By Omoruyi Edoigiawerie
Nigeria has seen a significant rise and expansion of the Start-up Ecosystem, particularly in the tech space.

According to the National Bureau of Statistics, in the last six years, medium-sized businesses in Nigeria contributed to 48 (Forty-eight) percent of the country’s GDP.

The Nigerian Start-up Ecosystem Report 2022, reports that Nigeria is the most popular tech start-up investment destination in Africa, and between 2015 and 2022, 383 tech start-ups raised over two billion dollars.

Nigeria’s population and relatively simple business laws make it attractive to investors and entrepreneurs.

However, before forming a business entity, the company’s founders must reach an agreement among themselves.

This serves as the foundation of the business and it is essential because, founders need to agree on the duties and responsibilities of each founder, of particular importance in the founders’ agreement is the “buy-sell clause”.

The Buy-Sell clause in a founders’ agreement/partnership agreement is a must-have for entrepreneurs who are starting or growing a business with a partner or partners and co-owners.

Buy-sell clauses, also called buyout clauses are clauses that govern how business interests are treated if one partner leaves unexpectedly.

A buy-sell clause for small business owners is a practical approach for safeguarding a company, customers, employees, and other stakeholders.

Buy-Sell clauses help determine how well the business interests of one partner will be managed if the other partner leaves suddenly or without sufficient notice.

It is also possible to draft the “Buy-Sell Clause” separately as a stand-alone agreement rather than incorporated into the founders’/partnership agreement.

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When a co-owner or partner wishes to leave the business, a buy-sell clause protects both the withdrawing and existing business owners.

The buy-sell clause can be likened to a “premarital agreement” that safeguards everyone’s interests, specifying the price and terms for a buyout if a co-owner wants out of the business, retires or sells their shares to third parties, or passes away.

Buy and sell clauses are designed to help partners manage potentially difficult situations in ways that protect the business and keep it immune from avoidable conflicts and pitfalls arising from the exit plans of one of the founders.

To prevent future disputes which may arise from such exit, the clause establishes a reasonable value for an individual’s share of the company. When one of the partners decides to quit the company, the buy-sell agreement ensures a smooth transition of ownership. This very important clause provides a practical approach to protecting the firm, its customers, employees, and other stakeholders to ensure a company’s long-term viability.

Buy-sell clauses or agreements are also similar to wills in the sense that they help co-owners or partners to determine who is entitled to their stake in a business upon their exit.

Cross-purchase agreements, redemption agreements, hybrid buy-sell agreements, company purchase agreements, and asset purchase agreements are all types of buy-sell arrangements.

The Need for a Buy-Sell Clause or Agreement for the sustainable growth and development of every start-up helps to ensure:

A fair value price for shares: it sets the fair worth of a person’s share in the firm, which is useful if a partner wants to stay in the company after another partner leaves.

Develop an exit plan for business partners: it identifies the parties involved and establishes a method for exiting the partnership if one of the partners decides to quit. If the conditions of the separation aren’t etched in stone, it might be difficult for former partners to agree).

A buy-sell agreement lays out the majority of the terms and conditions that business partners must adhere to should they decide to leave the company.

Creates a business continuity plan: Any unexpected death, illness, or sale of a portion of the company could throw an organization into disarray.

One can avoid some of the problems that these challenges caused by having a continuity or contingency plan in place. It will specify who is in charge of what, and how the business will function regardless of the circumstances.

Reduces emotional impact: Since the agreement is entered into before the business takes off, emotions are less likely to play a role in major decisions. People will be more concerned with the agreement rather than with their interests.

Founders of start-ups must ensure that a buy-sell clause is inserted into the agreement that guides their agreement to start a business.

This will ensure the smooth continuity of the business in the event of the withdrawal or death of one of the founders/owners. Without such clauses or agreements as the case may be, there may arise legal battles and contestation that are capable of stunting the growth of the business.

Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at [email protected].