A Buy and Sell Agreement

A buy and sell agreement is a legally binding contract that stipulates how a partner's share of a business may be reassigned if that partner dies or otherwise leaves the business. Concerning discussions regarding uses of Life Insurance, we need to look at life insurance as a tool that uses leverage to accomplish a task. One of these uses addresses eliminating a potential problem with people who are partners or co-owners of a business. What happens when one owner passes away? What happens to their share of the business? Life Insurance can be used to provide a remedy for this issue by providing financial funds for a Buy-Sell agreement.

What Is a Buy and Sell Agreement?

A buy and sell agreement is a legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, these agreements stipulate that the available share be sold to the remaining partners or to the partnership.

The buy and sell agreement is also known as a buy-sell agreement, a buyout agreement, a business will, or a business prenup.

KEY TAKEAWAYS

  • Buy and sell agreements stipulate how a partner’s share of a business may be transferred in the event of the partner’s death or departure.
  • They may also establish a method for determining the value of a business.
  • The two most-common buy and sell agreements are cross-purchase, and redemption; some agreements will combine the two.
  • Cross-purchase agreements allow remaining owners to buy the interests of a deceased or selling owner.
  • Redemption agreements require the business entity to buy the interests of the selling owner.

Buy and sell agreements are commonly used by sole proprietorships, partnerships, and closed corporations in an attempt to smooth transitions in ownership when each partner dies, retires, or decides to exit the business.

The buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula.

In the case of the death of a partner, the estate must agree to sell.

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