The foundations of a buy/sell agreement:
When it comes to the sale of companies, the positions of the buyer and the seller are mirror images of each other. A buy/sell agreement really comes down to enforced expectations. The whole purpose of most any contract is to make sure each side gets exactly what they expected and avoids unpleasant surprises.
If you’re buying a company, you want to make sure that you’re getting exactly the business that you thought you were getting, and you want to make sure that nothing comes up after closing as an unexpected surprise. The last thing you want as a buyer is for an unexpected claim to arise in the form of a lawsuit, a warranty claim, or a prior customer coming after you with grievances that they are asking you to make right.
A buy-sell agreement on the seller’s side basically is a mirror image. The need for a buy-sell agreement on the seller’s side is to ensure, first and foremost, that they get what they wanted for the sale of the business. Sometimes you get that in cash at closing, sometimes the purchase price is going to be paid over time, and sometimes the purchase price over time is going to depend on the performance of the business after closing. So, you want an agreement that makes sure that everything you expect can be enforced.
One of your priorities as a seller may be that you can ride off into the sunset after the sale. If that’s your goal, you have to make sure the contracts are structured to let that happen — meaning that, if a customer is disgruntled one month or ten years down the road after closing, they don’t come after you. You want to walk away clean.
Now, that may not always be the case. Depending on the type of business, buyers will want the previous owners of the company to stick around for a while – to show them the ropes, to help transition customers or clients, and to make sure the transition goes smoothly. That should also be put into writing: how much time are you expected to be putting in? When does the engagement end? How are benchmarks defined?
A well-drafted, carefully considered buy/sell agreement ensures that everyone’s expectations are aligned and, more importantly, that everybody has something to count on to make sure what they expected to happen actually does.
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