A Buy-Sell Agreement – What You Need To Know
A buy-sell agreement is a legal agreement between co-owners of a business that outlines the terms and conditions under which one owner can buy out the shares of the other owner. This agreement is used when one of the co-owners dies, retires, resigns or becomes disabled. A buy-sell agreement ensures that the remaining owner(s) have control over the business and that the departing owner’s share is sold to an appropriate buyer.
Why do you need a buy-sell agreement?
A buy-sell agreement is important because it protects the interests of the remaining owners and the business itself. It establishes a clear process for the sale of the departing owner’s shares, ensuring that the business continues to operate smoothly in the event of the departure of one owner. It also prevents the risk of ownership being transferred to an inappropriate party, such as a third-party purchaser who may have no interest or experience in running the business.
What are the types of buy-sell agreements?
There are four types of buy-sell agreements:
1. Cross-Purchase Agreement: This agreement is made between the co-owners of the business. In this type of agreement, each owner agrees to buy the shares of the other owner in the event of their death, resignation or retirement.
2. Redemption Agreement: This agreement is made between the business and its owners. In this type of agreement, the business agrees to buy the shares of the departing owner in the event of their death, resignation or retirement.
3. Hybrid Agreement: This agreement is a combination of both the cross-purchase agreement and redemption agreement. In this type of agreement, the owners and the business both agree to buy the shares of the departing owner.
4. Wait-and-See Agreement: This agreement is also a combination of both the cross-purchase agreement and redemption agreement. However, in this type of agreement, the owners wait to see whether the business or the owners will buy the shares of the departing owner.
What should you include in a buy-sell agreement?
A buy-sell agreement should include the following:
1. The valuation method for the business.
2. The circumstances under which the agreement will be invoked, such as death, retirement, resignation, or disability.
3. The purchase price and payment method for the shares.
4. The duration of the agreement.
5. Provisions for revising the agreement.
6. Any restrictions on the sale of shares to third parties.
In conclusion, a buy-sell agreement is an essential document that protects the interests of co-owners and their business. By defining the terms and conditions of a buyout, it ensures a smoother transition of ownership, protects the value of the business, and provides stability for the future. It is important to consult with a qualified attorney when drafting this type of agreement to ensure that it is legally binding and enforceable.