Purpose of a Buy-Sell Agreement
A buy-sell agreement is a legally binding contract that establishes the terms of a business sale or dissolution when a business owner passes away, retires, or becomes disabled. In essence, this type of agreement is a continuation plan for the business. Such an agreement protects the surviving or remaining business owners while ensuring the departing owner’s surviving family members receive fair compensation for the interest the departing owner held in the business. It also remains a vital component of estate planning.
Key Elements of a Buy-Sell Agreement
A typical buy-sell agreement outlines the key elements such as:
- Purchase Price and Method of Payment: The agreed-upon price of the business (the purchase price) and how it will be paid are included in this element. The buying party might have the right to finance the entire purchase price or request a third party to finance it.
- Transfer of Ownership Rights: The legal process of transferring ownership rights from the departing to the remaining owners is laid out in this element. This usually includes discussing the sharing of assets held by the company, such as inventory, investments, and properties; transferring intellectual property rights; and transferring any applicable company titles.
- Life Insurance: To ensure that the departing owner’s surviving spouse and children receive the purchase price of the business, most buy-sell agreements are accompanied by life insurance.
- Tax Obligations: As part of this agreement, parties should also agree upon the responsibility of filling and paying taxes.
- Additional Restrictions: Depending on the business nature, this element may include non-compete provisions or disclosure restrictions to protect confidential information.
When to Use a Buy-Sell Agreement
Buy-sell agreements are usually established when the company is founded or when ownership changes. It can also be used to set buying or selling terms between partners, shareholders, or owners. This type of agreement encourages potential buyers to invest in the company for the long term as they are more likely to get a fair price upon a sale.It is important to note that even though buy-sell agreements rarely cover all possibilities, they offer a basic framework to move forward in case of any unexpected events.