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A buy and sell agreement is a contractual agreement that specifies that a particular partner’s share of a business may be reallocated to another individual or group.
In many scenarios, business owners oversee the requirement of a buy-sell agreement without knowing the significance and effects that may arise due to the demise of one of the directors or even permanent disability, for that matter; or even the case of bankruptcy. A foolproof buy-sell agreement will facilitate many scenarios that may turn vital.
It is good, in a way, drafting a buy-sell agreement is not a difficult task. Before one drafts the buy-sell agreement, one needs to analyze and document the 5-Ws (who, what, when, where, and why) that may crop up.
Before we talk about the need of a buy-sell agreement, this agreement that is bound legally between the business and its owners that would specify in clear terms that would affect the control of the core management team whenever a significant event may arise like, but not limited to, demise, divorce or departure of any of the core members from the management committee/owners. The buy-sell agreement would also need to address the effects of conflicts that may arise amongst the core team in selling shares or equities.
A buy-sell agreement facilitates each and all owners’ interests, avoiding disruption in management controls and smooth transition of the business. This sort of agreement also creates stability in the work environment for others which would include minority owners and employees too. This agreement empowers deceased owners’ share to his/her successors without any litigation and other issues. Buy-sell agreements can be of utmost help, particularly for a small or family-owned business
Primarily there are three types of buy-sell agreements:
1) the “redemption” agreement,
2) the “cross-purchase” agreement
3) the “hybrid” agreement
The redemption agreement is defined in accordance with the business purchases of the interest of the departing owner.
The cross-purchase agreement is defined in accordance with the remaining owners buying out the departing owner.
The hybrid agreement (a combination of redemption and cross-purchase) is defined in accordance with the business and the owner may have the option of taking over the outgoing owner.
The agreement aims for a transition of ownership of the business when a partner dies or chooses to leave the business.
The agreement is towards a transition of business owners when a partner passes away or chooses to exit the firm. This legally binding document is commonly used in the instances of sole proprietorships, closed corporations, and partnerships.
The document will specify and define how the shares of the business must be sold to the company or other members. If it is in the instance of the partner’s demise, the estate can sell the shares.
The provision of Buy-Sell-Agreement would facilitate in many areas; namely
The business might end up having partners who don’t know about the business model and those influences might rock the boat of business functions.
And so on and so forth. For these reasons, it is a good practice to have a Buy-Sell-Agreement in place so that there is always a smooth transition.
A Buy-Sell Agreement would establish a reasonable share price for the institution. This would facilitate if the buy-out offer is reasonable and fair or not in case of disagreements within partners or one of the partners’ intent to leave the partnership.
The exit clause of any partnership needs to be well defined to mitigate the risks that may arise. Also, Buy-Sell-Agreements would provide a concrete framework for the business interests rather than some outsiders taking advantage and coming into the fray. The plan for Business-Continuity is very important and this is provided by the well-defined Buy-Sell-Agreement in place.
The need of a buy-sell agreement is that the agreement can be used by the management committee of a company on the procedure of buy/sell/transfer of shares that are owned by the Directors/owners of the company. This document is a written agreement established by the core team of founders/owners who have the majority shares of the company. This document will likely be kept on file with both the company itself and the individual owners, to have an individual record of what was agreed to.
This agreement will have the details of the owners and the respective share quantity they possess at the time of starting the establishment; the startup capital of the company and also the conditions/situations like voluntary transfer; involuntary transfer due to demise; the terminations and the effects of shares that are been owned by the owners to transfer to another person(s).
This agreement is to have consent amongst key people of the company ownership along with their spouses so that the conditions are intact as per agreed terms by all parties.
If you are in need of a Buy-Sell Agreement and wish to clarify your doubts – contact eSahayak today.