What is a Buy/Sell Agreement?
A buy/sell agreement sometimes called a buyout agreement, is a type of business succession agreement or contract. These agreements are made between co-owners of a business who agree to buy out the other’s shares if the departing owner can no longer work for the business. They can be used by partnerships and by companies, however the way that the departing owners’ shares are reacquired differs depending on the structure of the business.
How does it work?
Usually, business owners take out an insurance policy to cover or protect themselves. If an event occurs which triggers the obligation to pay out under the relevant policies of insurance then the buy/sell agreement comes into existence.
How does a Buy/Sell Agreement come into existence?
This type of agreement comes into existence once certain triggers or events in the contract occur. Common triggers are involuntary events such as death, total and permanent disability, critical illness and bankruptcy. However, retirement and divorce are other life events that can be nominated triggers for the agreement.
So what happens once a trigger event occurs?
Once a trigger event (that is stipulated in the agreement occurs) then the party who has suffered the event (e.g. is injured or is critically ill) agrees to sell their interest in the relevant business to their other business partners.
Why do people use this type of agreement?
These agreements provide financial certainty for the non-injured or unaffected business owners. They also provide financial certainty for an injured business owner or the estate of a deceased owner and significantly reduce the risk of protracted legal disputes. In other words, if you are a business owner, you should definitely consider drawing up a buy/sell agreement. As the saying goes, it is smart to hope for the best and plan for the worst!
Things to consider
As indicated above, buy/sell agreements should stipulate the circumstances that will trigger the transfer of ownership from the injured (or deceased) business owner to the non-injured business owner. The agreement should also address how the business will be valued to determine the value of the departing owner’s shares or interest. For example, the valuation can be agreed upon at the time that the agreement is created and adjusted periodically. Alternatively, an independent valuer can assess the value of the business at the time of the trigger event. This latter option is probably the smarter one for most businesses.
People often don’t like to think about what happens if someone were to die or be injured. Fine, we understand that, but old man time catches up with all of us eventually. Not much you can do about it unless your name is Connor MacLeod from the clan MacLeod and you are immortal. Protect your business future and call us today.