A Buy-Sell Agreement: What Is It?
A legally binding agreement amongst co-owners of a business that specifies what happens in the event of a co-owner’s death or voluntary departure is called a buy-sell agreement, sometimes referred to as a buyout agreement. It helps guarantee the survival of the company and the payment of beneficiaries to the departing owner.
What a Buy-Sell Agreement Is For
A buy-sell agreement is a binding contract that specifies the conditions of a business sale or dissolution in the event of the death, retirement, or disability of the business owner. This kind of agreement is essentially a business continuation plan. Such an agreement guarantees that the surviving family members of the departing owner receive just compensation for the interest the departing owner held in the business, protecting the remaining or surviving business owners. It continues to be an essential part of estate planning.
Crucial Components of a Buy-Sell Contract
Typical buy-sell agreements list the essential components, including:
- Purchase Price and Payment Method: This element includes the agreed-upon purchase price of the business and the method of payment. The purchasing party may be able to finance the full purchase price or may ask for financing from a third party.
- Transfer of Ownership Rights: This section outlines the legal procedure for transferring ownership rights from the departing owners to the surviving owners. This usually entails talking about dividing up the company’s holdings, like stocks, investments, and real estate; also, it usually involves transferring intellectual property rights and any relevant company titles.
- Life Insurance: The majority of buy-sell agreements include life insurance to guarantee that the selling owner’s surviving spouse and children receive the business purchase price.
- Tax Obligations: The parties should stipulate in this agreement who is responsible for filing and paying taxes.
- Extra Restrictions: To safeguard proprietary information, this element may contain disclosure restrictions or non-compete clauses, depending on the type of business.
When to Use a Buy-Sell Agreement
Typically, buy-sell agreements are created at the time of business formation or when ownership is transferred. Setting terms for purchases or sales between shareholders, owners, or partners is another application for it. Since they have a better chance of receiving a fair price when the company is sold, this kind of agreement encourages prospective investors to make long-term investments in the business.Though buy-sell agreements rarely address every scenario, it’s crucial to remember that they provide a basic framework for what to do in the event of an unforeseen circumstance.