Buy-sell agreement

Approach used for sole proprietorships, partnerships, and close corporations in which the business interests of a deceased or disabled proprietor, partner, or shareholder are sold according to a predetermined formula to the remaining member(s) of the business. For example, a partnership has three principals. Upon the death of one, the two survivors have agreed to purchase, and the deceased partner's estate has agreed to sell, the interest of that partner according to a predetermined formula for valuing the partnership to the survivors. Funds for buying out the deceased partner's interest are usually provided by life insurance policies, with each partner purchasing a policy on the other partners. Each is the owner and beneficiary of the policies purchased on the other partners.

When a sole proprietor dies, usually a key employee is the buyer/successor. The sole proprietorship, partnership, and close corporation under the entity plan can buy and own life insurance policies on the proprietor, partner, or shareholder and achieve the same result as when an individual buys and owns the policies.

1. Agreement between a bank or Mortgage Banker making a construction loan for a project and the permanent lender assigning to the latter the long-term mortgage on the completed project. Many lenders providing interim financing during the construction phase will not advance funds without a permanent Take-Out lender, who in effect buys out the original lender's interest in the project.

2. Agreement in a closely held corporation or partnership, whereby, in the event of death of one of the partners or other triggering event, the survivor offers to buy the interest of the other owners of the firm.

A pact among partners or stockholders under which some agree to buy the interests of others upon some event.
Example: Collins and Baker are partners. In the event Baker dies, Collins has agreed to buy Baker's interest for $25,000. If Collins dies first, Baker will buy her interest for $25,000.

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

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

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.

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