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Buy–sell agreement

Legal agreement in a trade

Legal agreement in a trade

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.

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a "business will". 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.

Clauses

A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls 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.

Profit or loss from a buy-sell agreement may trigger tax consequences and taxable income.

References

References

  1. de Frutos, M.-A. and Kittsteiner, T. (2008), Efficient partnership dissolution under buy-sell clauses. The RAND Journal of Economics, 39: 184–198. {{doi. 10.1111/j.1756-2171.2008.00009.x
  2. (2024-05-31). "Brooklyn business owner pleads guilty to tax evasion; underreported proceeds from his buyout agreement {{!}} Internal Revenue Service".
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