What Is a Business Buy-In Agreement?
A business buy-in agreement, also called a buy and sell agreement, is a legally binding agreement.3 min read
A business buy-in agreement, also called a buy and sell agreement, is a legally binding agreement. It's used to redistribute the shares belonging to a business owner back to the company if the business owner has become disabled, passed away, retired, or has conveyed an interest in selling their shares in the business. Other names that the buy and sell agreement are also known as are: buyout agreement, buy-sell agreement, business prenup, or a business will.
The buy and sell agreement makes a provision for the newly accessible business share to be available for redistribution within the company or to other members of the business based on a policy that was put in place in advance.
If the owner dies, then his estate has to approve the sale of his company interest. When that happens, his shares will either be sold back to the company or sold to his surviving partners. When a buy and sell agreement is not in place for the business, the consequences could mean that the business may experience serious tax repercussions or other financial hardships could result due to an owner departing the business for some unavoidable reason without having some form of plan in place so that the business can continue to function without difficulty.
What Are the Benefits of Having a Buy and Sell Agreement?
The primary purpose to create a buy-sell agreement is to plan for every possible occurrence and not rely on the idea that everything works out for the best because that isn't a sound business strategy. If you take the chance of not having a buy-sell agreement in place, you risk the possibility of several bad things happening to your business. Some reasons for having a buy and sell agreement in place include:
- There is a possibility that the business could end up with the wrong person, like a bitter spouse of a previous owner.
- While experiencing preoccupation by the court system, your business could perish while the remaining owners or your beneficiaries are fighting for their entitlements or their rights.
- If you don't have a primed buyer for your business previous to your exit, you or your beneficiaries may not get just compensation when you leave.
- It is imperative that you or your beneficiaries find a buyer for the business on short notice or expect that the sale price be below the fair market value.
Some Facts About the Buy and Sell Agreement
A buy and sell agreement is beneficial to closed corporations, sole proprietorships, and partnerships for the purpose of dividing the available business interest or share of an owner, partner, or stockholder, after they have exited the business. To secure the accessibility of capital if a partner should die, it is not unlikely for partners to take out life insurance policies on each other.
If the death of a partner should occur, the income from the life insurance policy is available for the purchase of a piece of the decedent's business interest. In the event that a sole proprietor passes away because there aren't any business partners or there aren't any beneficiaries, a top employee can be eligible to buy the business interest, making them the successor in ownership of the business.
If you have shareholders or partners in your business, a buy-sell agreement is vital because it outlines the responsibilities and rights of each shareholder and/or partner with regards to maintaining the business. It gives you, your business partner(s), and shareholders the chance to anticipate certain situations such as:
- What to do if you and your partner, shareholders, etc. had an inextricable dispute and one or more of you decided to exit the business?
- What if your partner/co-owner suddenly died and his/her spouse wanted to have a say in how the business operated?
If you have any further questions about business buy-in agreements and if you should have one for your business, the lawyers of UpCounsel.com will assist you in understanding these types of business agreements and help you decide what is best for you and your business. Post your legal need on UpCounsel's marketplace to ask any legal questions concerning how these agreements can impact your business.
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