How A Buy And Sell Agreement Works
Buy and sell agreements are commonly used by sole proprietorships, partnerships, and closed corporations in an attempt to smooth transitions in ownership when a partner dies, retires, or decides to exit the business.
The buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula. In the case of the death of a partner, the estate must agree to sell. To fund the purchase of the shares by the surviving partners, life insurance policies are taken out reciprocally by each partner on the lives of the other partners.
There Are Two Common Forms Of Buy-Sell Agreements:
- Cross-purchase agreement, the remaining owners or partners purchase the share of the business that is for sale.
- Entity-purchase agreement (also known as a redemption agreement), the business entity itself buys the deceased’s share of the business.
What is the Benefit Of A Buy And Sell Agreement?
A buy and sell agreement assures a smooth transition of ownership and business continuity in the event of a departure of a partner or large equity owner. The agreement is a legally binding contract that establishes how the departing owners’ shares will be obtained by the remaining partners.
