What is a Buy-Sell Agreement?
A Buy-Sell Agreement is also known as a buyout. A Buy-Sell Agreement defines how a corporate owner or partner’s ownership interest is to be transferred or otherwise liquidated in the event of the owner’s death, incapacity, or departure from the corporation – similar to a prenuptial agreement in a marital arrangement.
What is in a Buy-Sell Agreement?
Buy-Sell agreements, as well as the other types of operating and ownership agreements must be included in any type of business formation where there is more than one owner.
The Buy-Sell Agreement typically specifies at least three specific provisions with regard to the ownership interest of a corporate owner: These include the following:
- 1 Who is allowed to purchase the ownership interest of the departing owner or partner (The Buyout).
- 2 What specific events put into effect or “trigger” the Buy-Sell Provisions, such as death, insolvency, etc.
- 3 How the value of the ownership interest is to be calculated, perhaps also including insurance or other provisions to ensure financial liquidity to the corporation in the event of the departure.
Buy-Sell Agreement vs. Business Will
A Buy-Sell Agreement is can also be referred to as a “Business Will” because it specifies the provisions for the transfer of ownership of a Corporate Formation under specific circumstances.
The Buy/Sell agreement itself is not part of the actual Will of an estate owner, if in fact they have a Will governing the affairs of their estate after death. However, the monetary value of the corporate holdings do constitute part of the estate of a deceased person, unless those holdings have been transferred to some form of estate Trust or other estate planning solution that negates the need for the probate and estate administration process.
A Buy/Sell agreement may be a stand-alone document, or it may be included as a provision of a corporate Stockholder’s or partnership Member’s Agreement, or as part of an Operating Agreement. As with a Buy/Sell agreement, the provisions in these other types of documents may also include conditions and limitations on the cross-purchase by other partners of a departing member, or specify details governing the repurchase of stock from the departing shareholder by the corporation.
If corporate documents are created that include conflicting provisions, or otherwise overlook or include illegal or unenforceable provisions, there can be significant risk, delays in ownership transfer, and adverse impacts on the operations or continued existence of a corporation.
Business Contracts Attorney
In order to assure that ownership interests governed by a Buy-Sell or other agreement are adequate and valid, it is important that an experienced corporate attorney review all other existing and future documents governing the ownership and operation of each corporate entity. Contact Smith & Shapiro at one of our law offices in Henderson or Las Vegas, 8:00am – 5:00pm, Monday through Friday, to schedule an appointment. (702) 318-5033