Buy–sell agreement - Wikipedia

Buy–Sell Agreement

A buy–sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.[1]

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a "business will". An insured buy–sell agreement (triggered buyout is funded with life insurance on the participating owners' lives) is often recommended by business succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.

Clauses

A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls 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, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and;
• 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.

Profit or loss from a buy-sell agreement may trigger tax consequences and taxable income.[2]

References

1. ↑de Frutos, M.-A. and Kittsteiner, T. (2008), Efficient partnership dissolution under buy-sell clauses. The RAND Journal of Economics, 39: 184–198. doi: 10.1111/j.1756-2171.2008.00009.x
2. ↑"Brooklyn business owner pleads guilty to tax evasion; underreported proceeds from his buyout agreement  Internal Revenue Service". 2024-05-31. Archived from the original on 2024-05-31. Retrieved 2024-06-20.