What is a buy/sell agreement?
A buy-sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.
It may be thought of as a sort of premarital agreement between business partners/shareholders or 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 or 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)
- What price will be paid for a partner's or shareholders interest in the partnership and so on.