Charles Marsala Explains The Basics of Buy-Sell Agreements

Charles Marsala November 23, 2014 0
Charles Marsala Explains The Basics of Buy-Sell Agreements

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.
Every co-owned business needs a buy-sell, or buyout agreement the moment the business is formed or as soon after that as possible.
It may be thought of as a sort of premarital agreement between business partners/shareholders. 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.
A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement and controls the following business decisions:
Who can buy a departing partner’s share of the business?
What events will trigger a buyout, (the most common events 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?
However a Buy-Sell Agreement can lead to a “Forced Buyout” depending on its structure. A minority partner should be careful that the proposed agreement does not allow the majority member to force the minority to sell their shares either to the majority stockholders or to the company itself. In a well-structured buy-sell agreement, the offer by an outsider to purchase the company should allow a shareholder to counteroffer. The agreement should also specify how to determine the fair value of the shares subject to forced sale.
This article is for informational purposes only and not a substitute for tax or legal advice. Consult the appropriate professional to learn how this information applies to your unique situation.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com

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