We are a Veteran Owned Business, providing 20% discounts for Veterans, First Responders, Elementary and High School teachers. We remain open during the shutdown period, so please contact us to set up a phone or Zoom meeting. Taking care of you and your family, It's What We Do!

Skip to Content
Klenk Law

What’s a Buy-Sell Agreement?

Posted on Tue May 5, 2020, on Buy-Sell Agreements

From Our “Ask a Question” Mailbag: “What’s a Buy-Sell Agreement, and do I need one to protect my business?”

What’s a Buy-Sell Agreement?

Peter Klenk, Estate Planning Lawyer.

What’s a Buy-Sell Agreement?

If you’re a small business owner, consider what happens to your ownership interest in the company when you die or retire. If you’re in a partnership, should your share go to the remaining partners? To your children? To the highest bidder? What if you own a sole proprietorship? If any of these questions are relevant to you, you and your business can benefit from a Buy-Sell Agreement.

Also known as a business prenup, a business will, or a buyout agreement.

A Buy-Sell Agreement (also known as a business prenup, a business will, or a buyout agreement) is a binding contract that controls what happens to your share of a company when you die, retire, or upon some other predetermined event. There are numerous advantages to using a Buy-Sell Agreement. A properly drafted agreement will specify a set purchase price or purchase price formula. A well prepared buy-sell agreement offers protection against a volatile market and avoids complicated valuation issues down the road. Buy-Sell Agreements are also an effective means of keeping small businesses within the family and not sold off to strangers.

What Type of Businesses use Buy-Sell Agreements?

Buy-Sell Agreements are often used by sole proprietorships, partnerships, LLCs, and small, closely-held corporations. They come in three flavors: redemption, cross-purchase, and hybrid.

Redemption Agreements.

A Redemption Agreement typically requires the business entity to purchase your share at an agreed-upon price upon the occurrence of a triggering event (i.e., death, retirement, disability, divorce, or loss of professional license). Of course, the agreement also obligates you (or your estate) to sell to the company. Redemption Agreements don’t work for sole proprietorships since there is no distinction between the business and the owner.

Cross-Purchase Agreements.

A Cross-Purchase Agreement is like a Redemption Agreement with a critical difference. Instead of requiring the business entity itself to purchase your share, the agreement obligates the remaining owners of the company to buy you out proportionally. Sole proprietors can use a form of the Cross-Purchase Agreement, known as a One-Way Buy-Sell Agreement. If you can find a willing buyer (your employees perhaps?), that buyer agrees to purchase your sole proprietorship upon your death or retirement.

Hybrid Buy-Sell Agreements.

A Hybrid Buy-Sell Agreement combines elements from Redemption Agreements and Cross-Purchase agreements. For instance, a Hybrid Agreement might give the business entity and the other individual owners rights of a first and second refusal. In that case, the entity has an exclusive option to buy your business interest.  But, if it declines, this gives the remaining owners the same opportunity.

More Detail.

Buy-Sell Agreements are flexible ways to plan for the future of your business. Feel free to contact our estate planning attorneys for a consultation. For more detailed information about Buy-Sell Agreements, see our main article, “Business Succession Plans: Everything You Need to Know.” 

In Conclusion: What is a Buy-Sell Agreement, and do I need one to protect my business?

I hope you found helpful this short article addressing the question, What is a Buy-Sell Agreement? I have also included some links for more detailed information. If you are curious about Succession Planning, or other various planning techniques, contact us. Let our Buy-Sell lawyers help walk you through what can be a confusing process. In fact, feel free to contact our office for a free consultation. 

It’s All We Do!

Attorney Andrew Barron wrote this article.

Tags:

Buy-Sell Agreements

What Our clients are saying

Klenk Law Logo
Stars

Peter recently gave a presentation about Wills & Trusts at my employer, and it was fantastic! He was extremely knowledgeable and provided valuable information to the group. People were very engaged and asked several questions, all of which Peter thoroughly answered. Personally, my husband and I have selected Peter to help us with our estate planning, and he has been very helpful in providing us with all of the information we need to provide a secure future for our family. Thank you, Peter!

Klenk Law Logo
Stars

Peter was excellent. He explained everything very clearly and is super friendly. My wife and I originally tried using a lawyer through group legal coverage, but unfortunately the old adage - "you get what you pay for" - applied to the other lawyer, and we decided to go with a real professional.

Klenk Law Logo
Stars

We recently used Peter's firm to update our wills and trusts. We found he and his staff to be well-informed, professional and highly efficient. And equally valuable, Peter explains the law in terms that a layperson can readily understand.

Klenk Law Logo
Stars

Peter is a model attorney who puts his clients first at all costs. His extensive expertise in estate planning and tax planning was a great comfort as we began, and have expanded, our family. He is very thoughtful, generous, and quick witted. His approach towards his business has been an inspiration to his peer group, and his zest for life is extremely infectious. Without reservation, I highly recommend Peter as trusted and cherished counsel

Klenk Law Logo
Stars

Like another reviewer, I contacted Peter through his website using the free consultation link, for a question regarding PA inheritance taxes. The question was quite technical and difficult to explain, and the answer was nowhere to be found on the web. Peter grasped precisely what I was asking, and provided a clear, helpful response (with a touch of humor) the very next day.

Let us put our expertise to work for you.

Free consultation within 24 hours.