What happens if a co-owner dies, retires, leaves or becomes disabled
A buy–sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies, becomes permanently disabled, retires, or chooses to leave the business.
It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a ‘business will’. An insured buy–sell agreement (a triggered buy-out that is funded with life insurance on the participating owners’ lives) is often implemented to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.
A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate freestanding agreement, and controls the following business decisions:
- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders).
- What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company).
- What price will be paid for a partner’s or shareholder’s interest.
The two types of buy/sell agreements are:
- Cross-purchase agreement – Upon the death or serious illness of the owner the other business owner/s purchase the outstanding share from the executor of the estate.
- Company redemption agreement – Under this agreement the company will buy back the interest of the deceased/disabled owner. The owner, or their estate, will receive cash from the company, and the company will purchase and cancel the shares.