Buy Sell Agreements Defined - This agreement is not about buying and selling companies, it is a binding contract between business partners about the future ownership of the business.
Buy Sell Agreements:
Within a closely held corporation, shareholders are often concerned about what might occur if one of the owners dies. Will the deceased shareholder’s family retain the economic value of the corporate interest? Can the surviving owners avoid interference from the deceased shareholder’s family? Will the survivors have the economic resources to redeem the deceased owner’s interest? Given these concerns, corporate owners are best served by entering into a buy sell agreement while they are all alive.
There are two basic types of agreements. With a cross purchase agreement, each owner of the corporation purchases an insurance policy on the other shareholders. The purchaser is both owner and beneficiary of the policies. Upon the death of a shareholder, the other shareholders are then able to use the life insurance proceeds to purchase the deceased owner’s shares. Another commonly used type of agreement is a stock redemption agreement, in which the corporation owns policies on the lives of the shareholders. When a shareholder dies, the corporation buys the deceased shareholder’s interest in the company with the insurance proceeds.
A buy sell agreement is made up of several clauses in your written partnership agreement that control various business decisions such as:
the agreement states who can buy a departing partner's share of the business, this can include outsiders or it can be limited to other partners
the agreement states what events will trigger a buyout
the agreement will dictate what price will be paid for a partner's share in the partnership.
A Buy Sell Agreement will instruct the partners how you have agreed to handle the sale or buyback of an ownership interest when one partner's circumstances change. The events that can trigger a buy out of a partner's interest under a buy-sell agreement are:
an attractive offer from an outsider to purchase a partner's share in the company
a divorce settlement in which a partner's ex-spouse stands to receive an ownership interest in the company
the foreclosure of a debt secured by an ownership interest