Buy and Sell Agreement

What is a 'Buy and Sell Agreement'

A buy and sell agreement is a legally binding agreement used to reallocate a share of a business if an owner dies or leaves the business. Also called a "buy-sell agreement," a "buyout agreement," a "business will" or a "business prenup," buy and sell agreements are used by sole proprietorships, partnerships and closed corporations to divide the business share or interest of a proprietor, partner, or shareholder. The owner of the business interest being considered has to be disabled, deceased, retired or expressed interest in selling. The buy and sell agreement requires that the business share is sold according to a predetermined formula to the company or the remaining members of the business. Before the interest of a deceased partner can be sold to the company or remaining partners, the deceased's estate must agree to sell. Without a buy and sell agreement in place, a business can face significant tax burden or other financial difficulties if an owner dies, retires, becomes divorced or otherwise leaves the business.

Breaking Down 'Buy and Sell Agreement'

In order to ensure the availability of funds in the event of a partner's death, most parties will purchase life insurance policies on the other partners. In the event of a death, the proceeds from the life insurance policy are used to purchase a portion of the deceased's business interest. It is important to note that when a sole proprietor dies, since he/she has no partners, a key employee is the buyer or successor.

Buy and Sell Agreement: Who Needs Them?

Buy and sell agreements are useful to individuals under a variety of scenarios, such as what triggers a buyout of one partner's share by another partner or partners, and under what conditions. They include:

  • You want to establish a fair value of a share of a business before any dispute between owners in case one want to exit and sell out, and another wants to remain and buy out the exiting partner.
  • You are a co-owner of a business and want to place restrictions on other owners who may seek to sell their interest to another person or entity that may not have the best interests of the business or remaining partners in mind.
  • You want to stipulate that owners or their estates must sell their share of a business back to the business so the remaining partners can keep control of the company when an owner dies, becomes incapacitated or exits for any other reason.
  • You want to stipulate that remaining owners must buy the interest of an exiting or deceased owner to ensure liquidity.