Buy Sell Agreement
for your business
Learn how a Buy-Sell Agreement protects you when ownership changes, or get your business continuity checked today.
What is Buy-Sell Agreement?
A Buy-Sell Agreement is a document that legally binds the parties involved in buying and selling a business upon a "trigger event".
It is an essential part of business succession planning that ensures the company's continuity and that it falls into the right hands. The agreement outlines a pre-determined price or method for valuing the business and allows surviving business owners to purchase shares from a deceased or outgoing owner.
What Happens Without a Buy-Sell Agreement?
BACKGROUND
Mr. Chen's Auto Repair Business
- Mr. Chen, the owner and 60% stakeholder of Chen's Auto Repair, ran the business for over 30 years alongside his two co-owners, who each held a 20% share.
- As the only specialist in European car engines—a niche that drove much of the company’s revenue—Mr. Chen’s expertise was essential to its success.
THE TRIGGER EVENT
The Sudden Loss
- Mr. Chen passed away unexpectedly, leaving his wife, a homemaker with no knowledge of the auto repair industry. She inherited his 60% stake.
THE IMPACT
The Cost of No Plan
- After Mr. Chen’s death, his partners offered to buy his wife’s 60% share at a low price, claiming the business would suffer without him.
- They didn’t disclose a $500,000 credit line Mr. Chen had personally guaranteed. Overwhelmed and unaware, she sold—losing most of the family’s wealth and future income.
Type of Trigger Events
The Buy-Sell Agreement is activated upon the occurrence of the trigger event. These are some possible trigger events.
Death
Death of one of the business owners will trigger the activation of the Buy-Sell Agreement. The surviving business owners will then purchase the shares of the deceased business owner. The purchase of shares usually occurs upon receipt of the insurance proceeds.
Bankruptcy
In the event of bankruptcy of a business owner, the remaining business owner may exercise their rights to purchase the shares from the bankrupted business owner. This can prevent the shares from being liquidated to unknown parties.
Retirement
Many business owners will want to cash out their shares upon retirement. The Buy-Sell Agreement allows the remaining business owners to purchase the shares of the retired business owner instead of selling the shares to someone outside the business.
Critical Illness
Upon diagnosis of Critical Illness, the business owner may not be able to contribute to the business operations. In such cases, the remaining business owners will purchase the shares of the critically ill business owner. As critical illness payout varies across policies, it is crucial to have a clear definition in your Buy-Sell Agreement.
Total or Permanent Disability
An existing business owner's sudden and unforeseen disability is another trigger event that activates the Buy-Sell Agreement. In such cases, the disabled business owner may be unable to continue working. Hence, the remaining business owners will purchase the shares of the disabled business owner.
Frequently Asked Questions About Buy Sell Agreement
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