By definition, buy and sell agreement means a legally binding contract indicating what happens to a partner’s share of the business once the person leaves the business or passes away. This agreement is also known as a business prenup, a business will, or a buy-out agreement. This is generally used by sole proprietorships, partnerships, or closed corporations to facilitate easier business or ownership changeovers in the event of a partner’s demise or retirement, or when a partner leaves the company for any other reason.
A buy-sell agreement is most often put in place to avoid unwanted scenarios such as hostile take-overs from the spouse of a deceased partner, or sudden bankruptcy when a partner files without your knowledge. This agreement also allows owners and partners to prepare should they allow new players to come in the future.
The most basic of these agreements is the cross-purchase buy-sell agreement. The remaining owners purchase the shares but do not necessarily require the company itself to purchase. This is usually financed by the life insurance held on the deceased shareholder, so all partners take on life insurance on each other. The partners pay the premiums and the shareholders are the trustees. If there are too many shareholders, a trustee can be appointed as the beneficiary, and the trustee holds the policy for every stockholder and would be a representative for the others in a transaction. The trustee is responsible for the equal distribution among shareholders when one partner passes away.
The other type is the entity-purchase buy-sell agreement. This requires the company to purchase the remaining shares. The business itself takes on life insurance on the shareholders at the same price as the partner’s share in the company, and the company pays the premiums. When the shareholder passes away, the amount of the policy is added to the deceased partner’s holdings and the interest is then handed over to the company.
Another type is the one-way buy-sell agreement between the owner and a future buyer. The buyer can be an employee, a family member, a competitor, or any other person. The buyer purchases an interest in the business and the owner is obligated to sell to this buyer when the owner passes away. However, when the buyer passes away before the owner, there is no obligation for the owner to purchase anything from the buyer’s estate.
These agreements can be drafted in whatever way the company chooses, and can also include a disability agreement should a partner be unable to continue working due to injury or any other disability. The company can also opt to draft a predetermined amount for purchase when a shareholder passes away and this gives the company to purchase the initial share and the rest of the partners can purchase afterward.
Whatever agreement a company chooses, the wording must always be chosen carefully and this can be one of the most difficult processes in a buy-sell agreement. East Coast Financial of Central Florida can help companies with the language needed in drafting these agreements. They can assist in making sure that the life insurance in the buy-sell agreement is carefully planned out so all parties in the agreement are covered.
Since there are different requirements in every state, East Coast Financial of Central Florida makes sure to tailor-fit agreements between all parties because there is no such thing as one-size-fits-all when it comes to buy-sell agreements. The company also ensures that the agreement is well-funded so the policy benefits have growth. Their team of experienced life-insurance protection agents is ready to walk you through the process and assist you step-by-step so your business has a properly funded buy-sell agreement.
John James is a content writer for Learn To Trade, the foreign exchange education and learning specialists – offering a range of training courses to help people understand the currency trading market, as well as its opportunities and risks.