Buy-sell agreement
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A buy-sell agreement may be thought of as a sort of "premarital agreement" between business partners/shareholders. It is sometimes called a 'business will'. An insured buy-sell agreement (agreement 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 also to guarantee there will be money when the buy-sell event is triggered.
In the sale of a business, a buy-sell clause (or Shotgun clause) in a shareholder agreement preserves continuity of ownership in the business and ensures that everyone is fairly treated, the buyer as well as the seller. It is a binding contract between business partners or shareholders about the future ownership of the business. A buy-sell agreement is made up of several legally binding clauses in a business partnership or operating agreement (or it can be a separate agreement that stands on its own) that can control 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, and;
(the most comment events that trigger a buyout are: death, disability, retirement, or an owner leaving the company)
- 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.
