Buy Sell Agreement LegalZoom: Everything You Need to Know
Whether you’re starting a business or you’re already running one, it’s important to have a solid buy-sell agreement in place. This legal document outlines what happens in case one of the partners or shareholders wants to leave the company or dies unexpectedly. Without a buy-sell agreement, your business could face financial and legal issues, not to mention disputes between partners or heirs.
At LegalZoom, you can create a customized buy-sell agreement that meets your specific needs. Here’s what you need to know.
What is a Buy-Sell Agreement?
Simply put, a buy-sell agreement is a contract between shareholders, partners, or members of a business. It outlines what happens if someone wants to sell their shares or if they pass away. It sets forth the terms and conditions under which the remaining owners can buy the departing owner’s shares. The agreement typically includes a valuation method to determine the fair market value of the company and the shares being sold.
Some common trigger events that can activate a buy-sell agreement include:
Without a buy-sell agreement, the departing owner would be free to sell their shares to anyone, even a competitor. This could lead to loss of control, disputes between partners or shareholders, and a myriad of other issues.
Types of Buy-Sell Agreements
There are several types of buy-sell agreements, such as:
– Cross-Purchase Agreement: In this type of agreement, the remaining owners buy the departing owner’s shares. Each owner agrees to purchase a percentage of the shares, based on their ownership interest. For example, if there are three owners with equal ownership (33.3%), each owner would purchase 33.3% of the departing owner’s shares.
– Redemption Agreement: In this type of agreement, the company buys back the departing owner’s shares. The remaining owners typically pay for the buyback through a life insurance policy on the departing owner, which pays out upon their death.
– Hybrid Agreement: This type of agreement combines elements of both cross-purchase and redemption agreements. For example, if there are three owners with equal ownership (33.3%), each owner would have the first right of refusal to buy the departing owner’s shares. If none of them want to buy the shares, the company would buy them back.
Benefits of Having a Buy-Sell Agreement
– Provides a smooth transition: With a buy-sell agreement in place, you can ensure a smooth transition when one of the owners wants to leave the company or dies unexpectedly. The agreement sets forth a plan for buying back shares, which eliminates the need for lengthy negotiations or disputes.
– Maintains control: Without a buy-sell agreement, the departing owner could sell their shares to anyone, including a competitor or someone who wants to change the direction of the company. With a buy-sell agreement, the remaining owners can maintain control of the company.
– Provides financial security: A properly funded buy-sell agreement can provide financial security for the departing owner’s family. Through a life insurance policy, the remaining owners can pay for the buyback of the shares, which ensures that the family receives fair compensation.
How LegalZoom Can Help
Creating a buy-sell agreement can be complex and time-consuming. However, with LegalZoom, you can create a customized agreement that meets your specific needs. Simply answer a few questions about your business, and LegalZoom will generate a buy-sell agreement tailored to your situation.
LegalZoom also offers a review service, where a professional attorney will review your buy-sell agreement to ensure that it’s legally enforceable and meets your needs.
A buy-sell agreement is a critical component of any business, as it provides a plan for what happens when an owner wants to leave the company or dies unexpectedly. Without a buy-sell agreement, your business could face legal and financial issues, as well as disputes between partners or shareholders. At LegalZoom, you can create a customized buy-sell agreement that meets your specific needs, ensuring a smooth transition and financial security for all parties involved.