A buy and sell agreement is a legally binding contract that stipulates how a partner’s share of a business may be reassigned if that partner dies or otherwise leaves the business. Most often, the buy and sell agreement stipulates that the available share be sold to the remaining partners or to the partnership. Buy-sell agreements often use life insurance policies to fund the potential buyout in the event of a partner’s death.
A buy and sell agreement may also be called a buyout agreement, a business will, or a business prenup.
Some key points on Buy-Sell Agreements:
- Buy and sell agreements stipulate how a partner’s share of a business may be transferred in the event of the partner’s death or departure.
- Buy and sell agreements may also establish a method for determining the value of a business.
- The most common buy and sell agreements are cross-purchase, and entity-purchase (redemption); some agreements will combine the two.
- Cross-purchase agreements allow remaining owners to buy the interests of a deceased or selling owner.
- Redemption agreements require the business entity to buy the interests of the selling owner.
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