Business, Legal & Accounting Glossary
n. a contract among the owners of a business which provides terms for their purchase of a withdrawing partner’s or stockholder’s interest in the enterprise.
A buy-sell agreement is a legally binding contract between shareholders and/or partners (owners) of a business that prohibits third parties from acquiring their ownership interest. It establishes a systematic succession plan for ownership and management of a business in the event that an owner wishes to exit.
Every private company with multiple owners should have a buy-sell agreement because it establishes the exit rules. When a co-owner chooses to leave the business or is forced to leave, a buy-sell agreement specifies who is permitted to purchase the departing owner’s shares (outsiders or other owners), what circumstances trigger a buyout (retirement, death, disability, irreconcilable differences, etc. ), and what price will be paid for the departing owner’s interest (repurchase or cross-purchase).
Life events, such as disability, can be difficult to manage, which is why the buy-sell agreement is critical. It typically includes a number of contractual provisions that safeguard the departing owner, such as formulating the valuation and establishing a funding mechanism and payment terms (could be an insurance policy). Additionally, the buy-sell agreement safeguards the other owners by limiting who can buy-in. The departing owner cannot simply sell to anyone outside the company, but must first offer the stock back to the company for a buy-back and/or to insiders with a first right of refusal.
Valuation
Exit Planning
Exit Strategy
Purchase and Sale Agreement
Material Adverse Change
Standstill Agreement
Lock-Up Agreement
Shark Repellents
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This glossary post was last updated: 26th January, 2022 | 0 Views.