A buy–sell agreement is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies, is forced to leave the business, or chooses to leave the business.
This agreement may be thought of as a sort of premarital agreement between business partners/shareholders, and is sometimes called a “business will”. An insured buy–sell agreement (triggered buyout is funded with life insurance on the participating owners’ lives) is often recommended by business-succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.
A buy–sell agreement consists of several legally binding clauses in a business partnership, operating agreement, or a separate freestanding agreement, and controls the following business decisions:
- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders);
- What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and;
- What price will be paid for a partner’s or shareholder’s interest in the partnership?
A buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy–sell arrangement, the service of a corporate trustee is recommended.