A buy-sell agreement, also known as a business continuity agreement, is a legally binding contract between business owners that outlines how ownership of the business will transfer in the event of certain triggering events such as death, disability, retirement, or voluntary exit from the business. The agreement is designed to protect the business and its owners from potential disputes, ensure continuity of operations, and provide a plan of action for when certain events occur.
The buy-sell agreement can be divided into three types: cross-purchase, redemption, and hybrid. A cross-purchase buy-sell agreement involves the remaining owners purchasing the shares of the departing owner, while a redemption buy-sell agreement involves the business itself purchasing the shares. Hybrid buy-sell agreements combine elements of both types.
A well-drafted buy-sell agreement should include the following key components:
1. Triggering events: The agreement should specify the triggering events that will activate the buy-sell agreement, such as death, disability, retirement, divorce, or voluntary exit.
2. Valuation method: The agreement should outline the method of valuing the business, whether it be through appraisals or predetermined formulas.
3. Funding mechanism: The agreement should detail the funding mechanism for the buyout, such as life insurance policies or installment payments.
4. Transfer restrictions: The agreement should include transfer restrictions on the shares of the business to prevent unwanted third-party ownership.
5. Dispute resolution: The agreement should include a dispute resolution process to handle any disagreements that may arise.
6. Termination: The agreement should outline the circumstances in which the agreement may be terminated.
Having a buy-sell agreement in place can prevent potential disputes and ensure the smooth transfer of ownership in the event of a triggering event. It is important to regularly review and update the agreement to reflect any changes in the business or ownership structure.
Overall, a buy-sell agreement is an essential document for any business with multiple owners. It can provide peace of mind and protect the business and its owners from potential conflicts and disruptions. It is recommended that business owners consult with a legal professional experienced in buy-sell agreements to ensure that their agreement is tailored to their specific needs and circumstances.