Buy and sell agreements

A buy-and-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 (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.

A buy-and-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-and-sell agreement (agreement funded with life insurance on the participating owners’ lives) is often recommended by business succession specialists and financial planners to ensure the buy-and-sell arrangement is well-funded and also to guarantee there will be money when the buy-and-sell event is triggered.

 In the sale of a business, a buy-and-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.