If you have entered into a business Partnership, you were likely thoughtful and cautious about selecting your business partner. The assignment of your partner’s interest in the business in the unlikely and unfortunate situation that they pass away or leave the business, can be accomplished in a Buy Sell Agreement.
What is a Buy Sell Agreement?
Also known as a Buyout Agreement, this agreement is commonly used by sole proprietors, partnerships, and closed corporations to ensure a smooth transition of ownership when a partner leaves the business. The agreement will require that the departing partner’s shares of the business be handled in one of two ways:
- Cross-Purchase Agreement: This requires that the shares be purchased by the remaining owners; and
- Redemption Agreement: This requires that the business entity bused back the shares.
Either of the above formations of a Buy Sell Agreement ensures that the business interests will not end up in the hands of an outsider to the business.
In addition to determining how shares are distributed, the Buy Sell Agreement details how the value of the departing partner’s shares will be assessed. Having a valuation method spelled out can be helpful if the partners ever face a dispute about the value of the company or a particular party’s interest. If the partners do not feel comfortable detailing a formula, the agreement can also specify that a business valuation expert will be responsible for the determination.