What is a buy sell agreement for business?
Discover best practices for developing a buy sell agreement.
Contracts are part of starting and running a business. From the moment you register your business, you are reviewing, sharing, and signing documents. Understanding the purpose of each contract and how it helps you protect your business is essential. If you’re starting a company with a partner, consider creating a buy-sell agreement.
What is a buy sell agreement used for?
When you write a contract or any kind of legal document, specificity is key. A buy sell agreement, or buyout agreement, is a contract that explicitly outlines what happens if a partner in a jointly owned business dies, goes bankrupt, retires, or leaves the business. Think of it like a prenuptial agreement for business co-owners.
While a buy-sell agreement is not required to start a business, not having one can put your future business at risk. Disputes between partners or their surviving spouses may happen down the line. Without terms in place, your business is left open to litigation, which will cost valuable time and money.
Benefits of a business buy sell agreement.
Although this agreement may be the last thing you want to think about when going into business with a partner, outline and agree on these terms from the outset to benefit your business in the following ways:
- Lays out a clear exit plan. Allows for the equitable transfer of wealth, ownership, and management.
- Helps out heirs. Guarantees a buyer for the assets heirs may not be equipped to manage and provides cash to pay any estate debt and taxes.
- Safeguards your business legacy. Ensures remaining owners that the former owner’s share of the business will not be passed on to someone who isn’t equipped to run the business.
- Creates continuity. Assures customers, creditors, and employees continuity, no matter what turnover ownership may see.
Make sure you consult a legal expert before developing your buy-sell agreement to ensure it meets your own business needs.
How do buy sell agreements work?
The goal of a buy sell agreement is to help any change in ownership take place smoothly. They typically come into play when a co-owner chooses to leave the business, retires, or passes away. Other major events that could be included in the agreement are a partner’s disability, divorce, or bankruptcy. It lays out the rules and expectations for what will happen to the owner’s share of the company, compensation amounts, and beneficiaries.
Types of buy sell agreements.
Each type of buy sell agreement provides a way for remaining owners and partners to buy out a partner’s share of the business. They also define what triggering events will put the buy-sell agreement into effect. Buy-sell agreements include the following types:
- Cross-purchase agreement. The remaining partner or partners purchase the share of the business for sale.
- Entity-purchase agreement. The business buys the share of the business that is for sale.
- Mixed agreement. Certain portions of the business share for sale can be purchased by the individual partner or partners while the business entity buys the remaining portion.
- Wait-and-see agreement. The remaining owners decide what is best for the business. Available shares can be purchased by the individual partner or by the business.
What’s typically included in a buy and sell agreement?
When you and your business partner are putting together a buy sell agreement, take the time to talk through various scenarios and decide what actions are best for your business and your partnership. Be sure to include the following information in your agreement:
- Events that trigger the option for a buyout
- Owners included in the agreement and their equity stakes in the company
- Your company’s most recent equity valuation
- How you will fund a buyout
- Designated beneficiaries in case of a partner’s death
One best practice to consider applying in your buy-sell agreement is purchasing life insurance policies on your partners. This is a common practice so that, in the case of a partner’s death, the money from the life insurance policy can be used for the buyout. Work with a licensed life insurance agent who specializes in policies for buy sell agreements.
Tools to create and sign buy sell agreements.
With Adobe Acrobat for business, you can create confidential, electronic buy sell agreements for your business and always stay on top of contract management. You can also easily sign, store, and share your agreements and contracts as electronic documents for a secure digital trail.