Buy-sell agreement
A buy-sell agreement is an agreement among the owners of a closely held business that restricts how owners transfer their interests and usually gives the other owners and the entity rights to purchase. Estate planning practitioners describe it as setting terms for voluntary or forced sales and for ownership events such as death, disability, retirement, and divorce.
How it works
A buy-sell agreement works by limiting who can acquire an ownership interest and by giving named parties a right to buy it.
Trigger events start the purchase process. Practitioners note that agreements commonly identify death, disability, retirement, divorce, and attempted impermissible transfer as possible triggers. A trigger event is the occurrence that the written terms tie to a sale or transfer of an interest.
The terms also cover how a sale happens. Another describes the agreement as addressing business valuation for transfer and tax purposes.
Where it shows up for owners of businesses, real estate and private investments
Owners of closely held businesses meet a buy-sell agreement at the point where ownership changes hands. Practitioners regard the agreement as addressing orderly transfer at death and succession when an owner is disabled.
In a business with several owners, the agreement also reaches retirement and divorce. An owner who retires, or an owner whose interest is affected by a divorce, is an example of an ownership event the agreement can address.
Points that are easy to confuse
Voluntary sales and forced sales both fall within the subject. Practitioners report terms for each kind of sale, so the scope of the agreement reaches well past a sale at death.
Transfer restrictions and purchase rights are two parts of one arrangement. The restriction limits what an owner may do with an interest. The purchase right gives the other owners and the entity a way to acquire it.
Valuation and succession are separate topics that the agreement can address together.
Common questions
What is a buy-sell agreement?
A buy-sell agreement is a contract among the owners of a closely held business. It limits owners' ability to transfer their interests and usually gives the other owners and the entity rights to purchase. Practitioners add that it sets terms for voluntary or forced sales and for ownership events.
What events can trigger a buy-sell agreement?
Which events apply depends on the written terms of each agreement, since the agreement itself sets the terms for ownership events such as these.