• The Basics

The Basics

A buy-sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.[1] 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 owner's lives) is often recommended by business succession specialists and financial planners to ensure the buy-sell arrangement is well-funded and to guarantee there will be money when the buy-sell event is triggered.[2]
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) and;

• 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.

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