How To Make a Buy-Sell Agreement
Owning a company with a business partner bears a lot of responsibility. It is important to prepare for the worst-case scenarios beforehand and define what happens if the other partner dies or decides to leave the company.
Specifying terms and conditions is the first step to securing yourself and the business. If you don’t know how to write a contract, you will benefit from a buy-sell agreement template.
What Is a Buy-Sell Agreement?
Buy and sell agreements are useful tools for handling potentially demanding situations. A buy-sell agreement is a legal document that stipulates the reassignment of one partner’s share in case they die, retire, or leave the company for any other reason. Usually, the agreement demands that the available share be sold to the partnership or the remaining partners.
A buy and sell agreement is also known as a:
- Business will
- Business prenup
- Buyout agreement
Why Do I Need a Buy and Sell Agreement?
Buy-sell agreements protect the company, remaining shareholders, and the departing partner’s legacy. The agreement will come in handy in the following situations:
- Death—If a business owner dies, their shares should legally be passed to the next of kin. If the heir chooses to control the shares, it could harm the co-owners, company, and employees
- Divorce—In case of divorce, the court could order the transfer of the shares to the ex-spouse of the owner, which could further affect the whole company
- Retirement—If the co-owner retires or decides to sell their shares, the agreement specifies the percentage of shares each of the owners is allowed to acquire
- Disagreement—An intense disagreement between two co-owners can cause separation and could lead to one party selling their shares to another company
What Should a Buy-Sell Agreement Sample Include?
Terms and conditions vary from one buy-and-sell agreement to another. The more people share the ownership, the more complicated the terms. Take a look at the following table to see what the buyout agreements generally include:
|Buy-Sell Agreement Clause||What It States|
Type of the triggering event
|Specifies the type of event that triggered the buyout. Triggering events in this clause refer to:
|Determines who is entitled to purchase shares in the buyout and what percent each partner should be allowed to acquire. The clause also defines payment schedules|
|Defines acceptable payment methods, which can include:
Fair price valuation
|Stipulates the value of the business for the purpose of the buyout|
Right of first refusal
|Verifies that the remaining partners are allowed to purchase the shares according to the pricing structure in the agreement. The clause also states that other shareholders cannot sell or transfer shares to an outside body|
Buy-Sell Agreement Types
There are three types of buy and sell agreements:
- Cross-purchase agreement—Enables the remaining partners to purchase the departing partner’s shares for a predetermined price
- Redemption agreement—The entity or redemption agreement allows the company to buy the interest of the co-owner that is leaving. Company life insurance policies usually enable this type of transfer
- Hybrid agreement—A combination of the two previous buy-sell agreement types. Both the remaining partner and company are required to purchase the interest from the previous co-owner
Tips for Writing Buy-Sell Agreement Forms
Online contract templates are useful, but writing your own buy and sell agreement sample enables you to insert all the clauses you need for your company and business partners.
You should try some of the following approaches when creating your template:
- Incorporate important terms from an online template
- Identify the parties included in the agreement
- Specify the purpose of the buy-sell agreement
- State the value and percentage of shares
- Explain the funding of the purchase—loans, insurance, installment payments, or other
- Decide on the payment plan—once in full, monthly payments, or a customized plan
- Insert the termination policy clause
- Add a law provision—it will make the agreement valid and enforceable in court in case there is a breach of contract
- Consult an attorney
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