A buy-sell agreement is an important legal document that helps LLC companies avoid future obstacles and challenges if and when an owner needs to sell their shares in the business. They’re important for all businesses looking to maintain tight control of their finances and company despite unprecedented changes arising in the future. However, you need to write buy sell agreement forms correctly for them to be legally valid.
This is where Lawrina can help. On this page, you will find a buy sell agreement sample to use as guidance, plus a simple buy sell agreement form for you to complete. We also discuss more the importance of this legal contract and answer your other frequently asked questions.
A buy-sell agreement form is a legal contract usually drafted when forming a business that sets forth to whom and when ownership of the business can or cannot be passed during unforeseen circumstances. It is also known as a buyout agreement form, a business will, or a business prenuptial agreement. Usually, the document stipulates that any shares owned by partners must be sold back to the company and its other owners in the case of retirement, divorce, bankruptcy, disability, or death. Their main purpose is to ensure control and management of company interests and finances regardless of the unpredictability of external situations.
Without buy-sell agreement forms being completed, the courts have a right to make decisions about the business stocks and shares in certain situations, such as an owner passing away, retiring, or divorcing. This could include the courts dismantling the business to sell shares to a new owner. Along with the ownership, this new person would be passed financial value and potential business decision-making privileges which are reserved only for shareholders.
For example, if a partner dies, their shares of the business will automatically pass on to the next of kin. This gives them the authority to make decisions that might not be in the company’s best interests. Therefore, buy-sell agreements are a must for any business that has more than one owner who wants to protect the company and prevent shares from being sold to another individual. Some more precise examples of when you may consider using our buy-sell agreement form are as follows:
When using our LLC buyout agreement template, you need to establish what events trigger the legal contract to come into play. Every business is different, so each will have its own rules and sell and purchase agreements that best suit the needs of its business. Nevertheless, there are two common forms of buy-sell agreements that businesses tend to make:
Oftentimes, companies will combine a mixture of the two. However, the result of either doesn’t impact the level of control. Regardless of which type of agreement is used, all shareholders end up with the same percentage of company interest, and the departing partner (or his/her estate in the case of death) gets money for their ownership stake.
Life insurance policies are a common way in which businesses ensure funds are available for repurchasing stocks. For example, all partners of the business will purchase life insurance policies for all other owners. In the event of one of the business shareholders dying, the proceeds from the policies each of the other owners have taken out can be used to purchase the business interest of the deceased. This model can also be used for sole proprietors by naming the person they wish to pass ownership onto as a sole beneficiary in their life insurance policy.
Any business can use our simple buy-sell agreement form to quickly draft a legal contract. You’ll find a buy-sell agreement sample below which you can use as a guideline. To help prepare you for writing the document, here is a list of everything that is included in a buy sell agreement that you’ll need to have ready:
One of the most important parts to include when using our buyout agreement template is the triggering events. In other words, what unforeseen circumstances will trigger the legal contract to fall into action and result in a buyout of company stocks?
According to US law, ownership shares are automatically passed onto the heirs of the deceased in the event of death. Businesses need to write a clause in buy-sell agreement forms that stipulates what happens in this situation. It could be that shares are passed to the family for a buyout or that the company repurchases the shares immediately.
Some divorces are amicable, and others are not. This can mean divorces pose a large and unpredictable risk to a business – an owner’s ex-spouse can end up with shares in the company and, with their currently turbulent relationship with their ex-partner, could compromise the entire business. Therefore, the next section of the LLC buyout agreement needs to state that shares will be bought by the company rather than being transferred to the ex.
A business often wishes to stipulate what happens in the event of a partner becoming disabled or suffering from a long-term illness that limits their ability to carry out their role in the company adequately. This clause in the buy sell agreement template should detail what is considered “long-term” and whether or not the shareholder has the option to buy back into the company if and when they can return to work as usual.
Disputes between business partners are unfortunately common, despite how optimistic and successful the company seems at the start. These might be personal or professional conflicts. Either way, internal struggles can sometimes not be resolved. It is good to include a clause on how to sever the partnership when using our buyout agreement template to provide a fair outcome for all parties and owners.
Next on the buy-sell agreement template comes the agreement on shares following retirement. Businesses should include the retirement age, whether or not company shares are retained by the retiree or sold back to the business, and whether there is an option for part-time or advisory work for the previous owner.
Next comes the agreed payment structure for any buyout following a triggering event. This section of the buyout agreement template must stipulate who can purchase shares from the departing shareholder and how these payments need to be made. There might also be caps on the percentage each current partner can own of the business or any other limitations.
As per the buy-sell agreement sample below, the contract must next explain how the company plans to establish a fair price for the ownership stake in the event of a buyout. You can use a fixed price, but this isn’t recommended as the company’s value is prone to market fluctuations and can increase or decrease over time. Some companies will include a formula, whereas others will pay a professional appraiser to value the business at the time.
Payment methods accepted in the event of a buyout are listed next on the buy-sell agreement forms. Life insurance policies are a common and easy way to ensure the business will have the funding behind it to purchase any shares. Other payment options could include loans, installment payments, cash payments, or certified checks.
The right of first refusal (ROFR) is the last thing included in a buy-sell agreement. This gives all owners the contractual right to enter into a business transaction and buy out the previous partner before any other entity, as per the contract terms. It also states that no owner can form new partnerships and sell their stock to an outside entity.
Please consider that this is a non-exhaustive list, but just a few main things this agreement should have,
Below is a PDF version of our buy-sell agreement sample that can be used as a guideline when drafting your contract. We suggest you use this as a buy-sell agreement template, so all elements required for the document to be legally binding are included. You can use and complete for free the downloadable buy-sell agreement forms (Microsoft Word and PDF).
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Frequently Asked Questions
A buy-sell agreement is a concrete way to protect the interests of any business in the event of unforeseen circumstances arising in the future. Without a legal contract in place, company stocks can end up being passed to individuals who don’t have the business’s best interests at heart. This means other owners may lose control of business affairs, which could have catastrophic impacts on the company and its finances. Buyout agreements prevent these issues and ensure the business remains in control.
Businesses can use our free downloadable buy-sell agreement forms to write the legal contract. However, contract lawyers can help draft the agreement, negotiate, and execute the terms. In businesses with multiple partners and shareholders, it is recommended that each party obtains legal counsel to help ensure they’re signing a fair contract that is beneficial to them and the business.
Many businesses agree to a fixed price when valuing the business. While this may be a fair price at the time, most companies fail to update these contracts, and as time passes, the value of the business changes. This can mean that the shares will either be over or under-valued in the event of a buyout, which is unfair to the departing shareholder and the remaining business owners.