What Is a Buy and Sell Agreement?

A buy and sell agreement (or buy-sell agreement) is a legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership. Buy-sell agreements often use 澳洲幸运5官方开奖结果体彩网:life insurance policies to fund🅘 a 🌳potential buyout in the event of a partner's death.

A buy and sell agreement may also be called a buyout agreement, a business will, or a business pre🍌nꦦup.

How a Buy and Sell Agreement Works

Buy and sell agreements are commonly used by 澳洲幸运5官方开奖结果体彩网:partnerships and closed corporations in an attempt to smooth transitions in ownership when a partner dies, retires, or decides to exit the business. They prevent outsiders from gaining control of part of the business and provide a way to determine the value of each owner's inteꦅrest.

A buy and sell agreement requires that the business share of a departing or deceased partner be sold to the company or the remaining members of the business according to a predetermined formula. To fund the purchase of the shares by the surviving partners, life insurance policies are often taken out reciprocally by each partner on the lives of the others, which can be paid for by the company as a 澳洲幸运5官方开奖结果体彩网:business expense, where the partners are the named beneficiaries.

Upon the death of a partner, the life insurance death benefit will be paid out to the remaining partners, who will use the funds to purchase the deceased's shares from their estate, ensuring continuity of the busine♐ss and its ownership structure. Having a buy-sell agreement avoids costly battles for control w🗹ith surviving spouses or children and the use of probate court.

Buy-sell agreements might also be used by a 澳洲幸运5官方开奖结果体彩网:limited liability company (LLC), conventional corporation, or 澳洲幸运5官方开奖结果体彩网:sole proprietorship, in which case it would designate an employee as a purch♕aser of the business or business successor.

Types of Buy-Sell Agreements

There are two✱ common forms of buꦅy-sell agreements:

• In a cross-purchase agreement, the remaining owners or partners purchase the share of the business that is for sale.
• In an 澳洲幸运5官方开奖结果体彩网:entity-purchase agreement (also known as a redemption agreement), the business entity itself buys the deceased's share of the business.

Some partners opt for a mix of the two,🎀 with some portions available f🌺or purchase by individual partners and the remainder bought by the partnership.

A wait-and-see agreement combines elements from each of these two, where neither the partners nor the entity is explicitly named. At the time when it becomes necessary, the agreement will become either one or the other depending on what's best for business continuity.

What Is Included in a Buy-Sell Agreement?

Buy-sell agreements can vary depending on the business owners' needs and the state’s statute for buy-sell agreements. Generally, they should include the following information:

• A list of the partners or owners involved and their current equity stakes
• A recent business valuation, which is used to place a value on each partner's interest
• Events that trigger a buyout, such as death, disability, bankruptcy, or retirement
• A breakdown of who buys and acquires what
• How the buyout would be funded—for example, via insurance policies
• Tax and estate planning considerations for the individual partners and surviving beneficiaries
  

Advantages of Buy-Sell Agreements

Buy and sell agreements are designed to help partner🍌s manage potentially difficult situations in ways that protect the business and their own personal and family interests.

An agreement can restrict owners from selling their interests to outside investors without approval from the remaining owners, for example. Similar protection can be provided in the event of a partner's death. A typical agreement might stipulate that a deceased partner's interest be sold back to the business or remaining owners. This prevents the estate from selling the interest to an outsider.

In addition to controlling ownership of the business, buy and sell agreements spell out the means to be used in assessing the value of a partner's share. This can have uses outside the question of buying and selling shares. For example, if there is a dispute among owners about the value of the company or of a partner's interest, the valuation methods included in the buy and sell agreement would be used.

The Bottom Line

Business continuity is important, especially when there are multiple partners or important equity holders involved in the running of a business. A buy and sell agreement (buy-sell agreement) is a legal remedy for establishing a clear plan of how to distribute the shares of a departed or deceased partner to the remaining ones. In the case of a death, life insurance policies are used to fund the buyout of shares from the deceased's estate.