What is a Buy Sell Agreement?
A buy sell agreement is a legally binding agreement between business partners that explains the process of events after a partner leaves the business.
The process typically includes how, when, and where a partner’s share of the business will be reassigned, and the method and means used to assess the value of the ex-partner’s share.
The buy sell agreement is also known as a buy and sell agreement, buyout agreement, business prenup or business will.
The main focus of a buy sell agreement is typically the reassignment of a partner’s share of the business. This usually depends on how the partner leaves the business, also referred to as the triggering event. Triggering events can be voluntary or involuntary.
For example, an involuntary triggering event would be bankruptcy or death. A voluntary triggering event would be retirement or a desired choice to leave. If the death of a partner occurs, a buy sell agreement will explain options or obligations for the business on purchasing the shares. If a partner decides to leave of their own free will, a buy sell agreement will explain how the partner is allowed to go about selling their shares.
A buy sell agreement consists of several key elements, including the following:
- Business net worth
- Tax liability for ownership
- Payment terms for ownership
- Buyout triggering events
Do I Need a Buy Sell Agreement?
While not a legal requirement, a buy sell agreement is a fundamental practice for a successful business. A buy sell agreement applies to all business types, and provides benefits and protections to the business, either immediately or in the future. For example, if the business is valued at an amount that one of the partners disagrees with, the buy sell agreement addresses the valuation method that must be used, saving potential lawsuits or animosity between partners from occurring.
Partnership Buy Sell Agreement
A partnership buy sell agreement is simply a buy sell agreement constructed for business partnerships versus a different business entity, such as an LLC.
LLC Member Buy Sell Agreement
An LLC member buy sell agreement is simply a buy sell agreement constructed for LLCs versus a different business entity, such as a partnership.