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Buy-Sell Agreement basics

Reviewed by Rocket Lawyer On Call Attorney  Corey Carter, Esq

Buy-Sell Agreements protect your company from future problems by solidifying what happens if an owner wants (or needs to) to sell their part of the company, who can buy an owner's interest, and what will be the price. The agreement also clearly outlines what is to happen with an owner's part of the business should they die, become disabled, retire, declare bankruptcy or get divorced.


Use the Buy-Sell Agreement document if:

  • You and the other owners of the company want to control who is allowed to buy an interest in the business.
  • You want to outline what happens if an owner becomes disabled, retires, goes bankrupt or dies.
  • You want to establish a fair price for the business in advance of any disagreements between owners.
  • You want to decide what happens to an owner's interest if an owner divorces.
  • You want to require that anyone who inherits interest (by death or divorce) in the business must sell their portion to the company.

This Buy-Sell Agreement is suitable for all business entities, including corporations, partnerships and LLCs. The agreement can be created at any time but can be most helpful when completed during the early phases of the company.


Other names for this document:

Buy Sell Agreement Form, Buyout Agreement, Buy and Sell Agreement


What is a Buy-Sell Agreement?

Some call a Buy-Sell Agreement a "prenup" for businesses. And in a way, it is, since its normally created when the business begins and everyone is on the same page. Usually in the early stages of business, when everyone is generally agreeable, that is the perfect time to decide what should happen if problems arise down the road. Every co-owned business should have a Buy-Sell Agreement made as soon as possible. It outlines, before problems occur, what happens if an owner's interest in the company becomes available (for whatever reason), who can buy available portions, and what the fair purchase price will be.


Considerations for making a Buy-Sell Agreement

Making a Buyout Agreement is simple using our template. You just need to submit your basic business information, such as the list of owners. However, before the agreement can be made the owners will need to make some important decisions, including:

What happens if an owner wants out?
Will you require that their portion is sold to the remaining owners? How much notice must they give? What happens if the other owners cannot afford to make the purchase? Will a third-party buyer be allowed to purchase the interest if all members approve? Will life insurance be required?

What if an owner involuntarily loses possession of their portion of the business?
What happens if an owner dies and their beneficiary inherits their portion of the business? What if an owner divorces and their ex-spouse is awarded part of the business? What if a person dies and their executor needs to sell their portion of the business to cover debts? Will the other owners have the first option to purchase? If the owner is going to declare bankruptcy, how much notice do they need to give?

What is the value of the company and the purchase price?
You may need to consult with a professional to decide a fair value for your company. Often companies will hire a CPA and or a valuation professional to help them decide on a reasonable value of the company. If the value changes through the years, how will the current value be determined? Are their beneficial tax advantages to a certain value?

Will payment options be considered?
If you agree that payment options will be considered, how much will they need to pay down? How long do they have to pay the entire balance? Will interest be charged? How much time do they have to begin payments?


Buy-Sell Agreement insurance explained

It is in everyone's best interest if the Buy-Sell Agreement is protected with life insurance. In our document, you can require that each owner carry life insurance to cover their portion of the business should they die. What is typically required is that each owner must carry a current policy that covers their portion and if they should pass, the company or the co-owners would receive the benefits. The benefit is then used to buy the portion of the company left to the beneficiaries. This is a way to fund the purchase of buying that portion of the business back.


How to find a valuation professional

A valuation professional is a person or entity experienced in determining the value of your company. This value can be used to determine what a buyout price might be. To keep your agreements as fair as possible, it is a good idea to employ an impartial evaluator. A Certified Public Accountant (CPA) can help with determining your business value, or they may be able to recommend a few valuation professionals and/or professional organizations with members in your area.

If you are still in the process of forming your company, we can help you Start a Business.


Sample Buy-Sell Agreement

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Buy-Sell Agreement basics

This Buy-Sell Agreement is suitable for all business entities, including corporations, partnerships and LLCs. The agreement can be created at any time but can be most helpful when completed during the early phases of the company.


Other names for this document:

Buy Sell Agreement Form, Buyout Agreement, Buy and Sell Agreement


What is a Buy-Sell Agreement?

Some call a Buy-Sell Agreement a "prenup" for businesses. And in a way, it is, since its normally created when the business begins and everyone is on the same page. Usually in the early stages of business, when everyone is generally agreeable, that is the perfect time to decide what should happen if problems arise down the road. Every co-owned business should have a Buy-Sell Agreement made as soon as possible. It outlines, before problems occur, what happens if an owner's interest in the company becomes available (for whatever reason), who can buy available portions, and what the fair purchase price will be.


Considerations for making a Buy-Sell Agreement

Making a Buyout Agreement is simple using our template. You just need to submit your basic business information, such as the list of owners. However, before the agreement can be made the owners will need to make some important decisions, including:

What happens if an owner wants out?
Will you require that their portion is sold to the remaining owners? How much notice must they give? What happens if the other owners cannot afford to make the purchase? Will a third-party buyer be allowed to purchase the interest if all members approve? Will life insurance be required?

What if an owner involuntarily loses possession of their portion of the business?
What happens if an owner dies and their beneficiary inherits their portion of the business? What if an owner divorces and their ex-spouse is awarded part of the business? What if a person dies and their executor needs to sell their portion of the business to cover debts? Will the other owners have the first option to purchase? If the owner is going to declare bankruptcy, how much notice do they need to give?

What is the value of the company and the purchase price?
You may need to consult with a professional to decide a fair value for your company. Often companies will hire a CPA and or a valuation professional to help them decide on a reasonable value of the company. If the value changes through the years, how will the current value be determined? Are their beneficial tax advantages to a certain value?

Will payment options be considered?
If you agree that payment options will be considered, how much will they need to pay down? How long do they have to pay the entire balance? Will interest be charged? How much time do they have to begin payments?


Buy-Sell Agreement insurance explained

It is in everyone's best interest if the Buy-Sell Agreement is protected with life insurance. In our document, you can require that each owner carry life insurance to cover their portion of the business should they die. What is typically required is that each owner must carry a current policy that covers their portion and if they should pass, the company or the co-owners would receive the benefits. The benefit is then used to buy the portion of the company left to the beneficiaries. This is a way to fund the purchase of buying that portion of the business back.


How to find a valuation professional

A valuation professional is a person or entity experienced in determining the value of your company. This value can be used to determine what a buyout price might be. To keep your agreements as fair as possible, it is a good idea to employ an impartial evaluator. A Certified Public Accountant (CPA) can help with determining your business value, or they may be able to recommend a few valuation professionals and/or professional organizations with members in your area.

If you are still in the process of forming your company, we can help you Start a Business.

Use the Buy-Sell Agreement document if:
  • You and the other owners of the company want to control who is allowed to buy an interest in the business.
  • You want to outline what happens if an owner becomes disabled, retires, goes bankrupt or dies.
  • You want to establish a fair price for the business in advance of any disagreements between owners.
  • You want to decide what happens to an owner's interest if an owner divorces.
  • You want to require that anyone who inherits interest (by death or divorce) in the business must sell their portion to the company.
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