A buy-sell agreement may be thought of as a sort of “premarital agreement” between business partners/shareholders. It is sometimes called a “business will.” An insured buy-sell agreement (agreement funded with life insurance on the participating owner’s lives) is often recommended by business succession specialists and financial planners to ensure the buy-sell arrangement is well-funded and also to guarantee there will be money when the buy-sell event is triggered.
In the sale of a business, a buy-sell clause in a shareholder agreement preserves continuity of ownership in the business and ensures that everyone is fairly treated, the buyer as well as the seller. It is a binding contract between business partners or shareholders about the future ownership of the business. A buy-sell agreement is made up of several legally binding clauses in a business partnership or operating agreement (or it can be a separate agreement that stands on its own) that can control the following business decisions:
1. 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).
2. What events will trigger a buyout, (the most common events that trigger a buyout are death, disability, retirement, or an owner leaving the company).
3. What price will be paid for a partner’s or shareholder’s interest in the partnership and so on. 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.