A buy-sell agreement contains legally binding language. It can be a separate agreement between business partners and/or investors, or it may be included in the original partnership documentation and contracts or business operating agreement. Buy-sell agreements commonly:
Define who has the option to buy a partner's or shareholder's interest in the business after a triggering event has occurred. The list might include only specific family members, partners, or shareholders. It may also include outside people. The buyer can be a single person, a group, or the business itself.
Set the price that the buyer will pay for the business. Setting the purchase price ahead of time can help reduce certain types of taxes later on. A fixed price can be determined by a business valuation and/or using a formula. The agreement might state that the price will be paid in cash, or that it will be paid in installments. There also might be different prices associated with different triggering events (for example, the purchase price might be different in the case of a divorce or criminal conviction of a business partner than it is in the event of a partner's death).
List events that can trigger the buyout. After a triggering event, the buyer or buyers named in the agreement is obligated to buy the business interest from you or your estate. Events that commonly trigger the sale of a business under a buy-sell agreement include the following:
- Long-term disability
- Personal insolvency or bankruptcy
- Loss of professional license
- Criminal conviction
- Resignation or termination of employment
Remember: A buy-sell agreement is legally binding. You can't sell or give your business to anyone other than the buyer named in the agreement without his or her consent. For this reason, it's important to coordinate your estate planning with the terms of your buy-sell agreement, because you will be unable to reduce the size of your estate through lifetime gifts of your business interest.
First Commonwealth Bank and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.