Buy and Sell
A buy and sell agreement is concluded between the co-owners of a business and is also known as a buyout agreement, buy-sell agreement, or business will.
What Is Buy and Sell?
It is a legally binding agreement between the business partners. It stipulates the conditions of reassigning or selling a partner’s share in case this partner leaves the business or dies. It is something like a premarital contract or a will between the shareholders. Buy and sell agreements are commonly used by closed corporations, partnerships, and sole proprietorships.
The BSA requires that the business share be sold to the company or the remaining partners/shareholders according to a predefined formula. The purpose of such contracts is to help the owners manage potentially difficult situations in ways that protect the business and their own interests. For instance, a BSA can restrict the partners from selling their shares to third-party investors without the approval of the remaining shareholders. It can also stipulate that a deceased partner's share is sold back to the remaining owners. To make sure that the
funds are available, the owners commonly purchase the life insurance policies of the other owners. In the event of a death, the policy conditions will be used towards the purchase of the deceased's business interest.
A BSA may also help resolve a dispute between the partners about the value of the business or share by using the valuation methods included in the BSA.
There are two types of buy and sell agreements:
Cross-purchase agreement: The remaining shareholders purchase the share of the business that is for sale.
Repurchase agreement: The business entity buys the share of the business. Sometimes the partners use both types in one agreement.
Buy and Sell Example
A BSA controls the following business decisions:
Person or entity that can buy a departing partner's business interest (typically other partners but may also include third parties).
Events that will trigger a buyout (e.g. disability, death, retirement, or an owner leaving the company).
The price that will be paid for a partner's share.
Here is an example of sections and clauses that a BSA may include:
Introduction. General description of the agreement subject and parties.
Limiting the Transfer of Ownership Interests. Stipulation whether the transferring owner has the right to sell, transfer, or dispose of the ownership interest unless they deliver to the company a written Notice of Intent to Transfer stating the name and the address of the proposed transferee and the terms and conditions of the proposed transfer.
Providing the Right to Force Buyouts. This section describes possible scenarios under which the buyouts can be forced and possible solutions. Scenarios may include retirement or quitting of an active owner, disability of the owner, death of the owner when the owner’s interest is transferred to their former spouse, and when the owner is expelled by other owners.
Agreement Price. This section outlines the methods that will be used to value the company and thus determine a price for ownership interests under the agreement. The valuation methods typically include the agreed value, book value, multiple of book value, capitalization of earnings, and appraised value.
Payment Terms. This section specifies the payment terms to be used for the purchase of ownership interests, such as full cash payment, monthly installments, and payment under the customized schedule.
A buy and sell is a legal agreement between the business partners. It stipulates the conditions of selling or reassigning a partner's share in case they leave the business or die. Such contracts help the shareholders protect both the business and their personal interests in the case of unexpected situations.