A Brief Introduction About the Buy Sell Agreement
What is a buy sell agreement? A buy sell agreement is a legally binding contract that determines the distribution of the share of a partner who either dies or leaves the business. In most cases, the agreement states how the share of the partner withdrawing from the firm will be sold to the remaining partners of the firm or to the partnership.
The sale of the share of the withdrawing partner among the remaining partners or the firm is according to a predetermined formula.
Types of Buy Sell Agreement
The two most common types of buyout agreement are:
- Cross-purchase agreement: In Cross-purchase agreement, the existing owners of the firm buyout the shares of the owner who is withdrawing
- Entity-purchase agreement: The firm buys out the share of the owner who is withdrawing
Some partnerships opt for a combination of both forms of buy sell agreement where a part of the share is bought by individual partners, and the remaining part is bought by the firm.
Who Takes the Buy Sell Agreement? – People Involved
A buy sell agreement is taken by sole proprietorships, closed corporations, and partnerships. The people involved are the partners of a firm who want to ensure that the shares of the firm are not sold to a third party.
To fund the purchase of the partner who has withdrawn from the firm or dies, the partners of the firm purchase life insurance policies in the name of other partners.
Purpose of the Buy Sell Agreement – Why Do You Need It?
The purpose of this agreement is to protect the business by preventing the partners from selling their interest to a third party unless they get approval from the existing partners so as to control the ownership of the business.
The partnership buyout agreement states that the share of the deceased partner will be sold back to the firm or the remaining partners.
This agreement also mentions in detail the method by which the value of the partner’s share will be estimated. This ensures there is no dispute between the partners when it comes to the valuation of the company or a share of a partner.
These agreements ensure a smooth transition during the death of a partner, which is important for the business reputation in the eyes of key stakeholders like customers, suppliers, and key employees.
Contents of the Buy Sell Agreement – Inclusions
The agreement outlines the method in which the share of the partners will be valued and whether the existing partners or the firm or both will purchase the stake of the deceased partner or the partner who is withdrawing from the firm.
A business buy sell agreement must include:
- The parties to the agreement include the partners of the firm
- The name of the partnership firm and the registration number
- The nature of business being conducted by the firm
- The effective date of the agreement must be included
- The purpose of the agreement is the sale of a partner’s share during their lifetime or the estate to the remaining partners at a fairly established price as well as provision of part or the full amount of funds for the purchase of the share
- The percentage of shares held by each partner
How to Draft the Buy Sell Agreement?
Points to Consider While Preparing the Agreement
While drafting an agreement, the following points need to be kept in mind:
- The parties involved in the agreement and their relationship
- Address of the firm
- The effective date of the agreement
- The nature of the business that the firm is engaged in
- The objective of the agreement, which would be ensuring that the share of the deceased partner be sold to the existing partners and the funding of the share of the deceased partner
- Applicable laws of the state
- The conditions under which the partnership shall stand terminated
- Indemnity: The remaining partners of the firm shall indemnify the deceased partner’s estate of all partnership liabilities of the firm
This agreement can be drafted using the sample of an agreement to sell/purchase a business.
The key terms of a buy sell agreement are:
- Valuation: Of the share of the deceased partner
- Termination: The conditions for termination
Negotiation Strategy
As far as a buy sell agreement is concerned, the existing partners of the firm purchase the stake of the deceased partner or one who is leaving the firm. The valuation of the share of the partners is decided on the basis of a particular formula.
Benefits & Drawbacks of the Buy Sell Agreement
Benefits:
- Protection of interest of the firm: The whole purpose behind this agreement is to ensure that the controlling interest of the firm remains with the partners of the firm, whether it is a deceased estate of a firm or a partner leaving the firm
- The partner leaving the firm is assured of the fair market value of his or her share which would be paid to him or his estate after his or her death
- The agreement is also important for the image of the firm in the eyes of the stakeholders like the customers and vendors as it ensures a smooth transition when a partner dies or leaves the firm
Drawbacks:
- Rigidity: The agreement binds the partners to sell their stake to the firm according to a particular formula.
What Happens in Case of Violation?
Which of the following statements concerning buy-sell agreements is true?
- Premiums are deductible as a business expense
- Benefits are considered taxable income
- It pays in the event of a medical emergency
- They are normally funded with a life insurance policy
The fourth option is the right answer.
A buy sell agreement is used to ensure that the controlling interest remains with the partners of the firm.
In case of violation of any clause in the agreement by the partners of the firm, then the agreement will be rendered null and void according to the laws of the state. In such a case, the partners can sell their stake to a third party.
In order to protect the business from undesirable situations like disputes between partners on the death of a partner, a buy sell agreement should be entered into by the partners of the firm.
Sample Buy Sell Agreement
A sample of the agreement can be downloaded from below.
Download this USA Attorney made Original Agreement for only $9.99
By clicking the button below, I agree with the Terms & Conditions.This agreement is made between the Owner and Co-Owner on the effective date of 12th November 2011.
Owner represented by
Ms. Kelly Denver
Riverbrook Sports
Address: 372 Central Park West #20K, New York NY 10025
Contact number: (212) 557-4835
Co-owner represented by:
Ms. Julia Stiles
Riverbrook Sports
Address: 372 Central Park West #20K, New York NY 10025
Contact number: (212) 557-4836
Terms and Conditions:
- The terms, as well as the procedures set forth in this Buy Sell Agreement, will apply to the transfer of various shares, certificates, and other financial documents either during life or at death, as mentioned in Section 3 of this agreement.
- To accomplish the purpose of the Voting Trust Agreement and the Buy Sell Agreement, any sale, transfer, assignment, encumbrance, hypothecation, or alienation, regardless of the circumstances, manner, nature, or timing, or such transfer, whether during life or at death of either shareholder (“owner or co-owner”) is void except as specifically mentioned herein.
- Upon the death or resignation of either shareholder (“owner or co-owner”), the other known as “Survivor” henceforth, shall have an obligation to purchase the “Deceased” under the terms set forth in this Buy Sell Agreement.
- This Buy Sell Agreement supersedes all or any prior oral and written statements signed by the parties (“owner and co-owner”) with respect to this subject matter and includes any prior statement, representation, warranty, or condition. Any modification in this Buy Sell Agreement must be in writing and shall be signed by both or all parties involved.
IN WITNESS WHEREOF, the parties “Owner” and “Co-Owner” have executed this Business Separation Agreement as on the date set forth, which is 11/12/2011 (MM/DD/YY).
SIGNED FOR AND ON BEHALF OF OWNER BY:
…………………………………………………………….
Name:
SIGNED FOR AND ON BEHALF OF CO-OWNER BY:
…………………………………………………………….
Name: