Buy-Sell Agreement

Three Forms Of Buy-Sell Agreements Owners Can Use During Interest Sell-Off

Buy-Sell Agreement – This is a vitally important legal document that persons use to establish their business entity like creating a limited liability company as a business model.

State statutes mandate that owners must follow its directive and come into a buy-sell agreement. When you decide to form a limited liability company (LLC), it’s highly important you have a buy-sell agreement by the business planning stage.


A Look At Three Forms of Buy-Sell Agreement

This buy-sell agreement keeps owners from selling off their interest to a third-party without any kind of written consent of other owners. This agreement will come in one of three forms:

Entity-Purchase Agreement – The owner walking away from the business agrees to sell off this share to the entity, which then gives up ownership interest.

Cross-Purchase Agreement – This kind of agreement is the easiest form, which generally occurs when the pull out owner agrees to sell of his/her interest to the other owners. This is ideal for small businesses with just a couple of owners. As more owners get into the business, the form can become uncontrollable. Larger businesses would be better suited with the entity-purchase agreement.

Hybrid Agreement – The hybrid agreement is a combination of both the cross purchase and entity agreements. Generally, the withdrawing proprietor should offer up his/her ownership shares first to the entity. For whatever reason the entity decides not to take up the shares, the shares will need to be offered to additional owners.

Make sure that the ownership documentations are validated with a restriction of transfer notice, which was designed by the buy-sell agreement. In the majority of cases, state statutes stipulate that clear, unambiguous language must be used in all ownership documentations. Thus, make sure to research what the statute specifies in your state to ensure language requirements for the ownership documentation.

A buy-sell agreement that’s been well-prepared will describe in detail how the interest is going to be sold. It’ll stipulate how much of it will be sold. It’ll also lay out how the interests are valued, which will reduce the possibility of owners getting into disagreements.

It’s very possible for unexpected events to come up that could force the sale of an ownership interest like:

- Death
- Incapability
- Involuntary termination of shareholder disputes
- Liquidation situation
- Bankruptcy

For the most protection possible, owners tend to purchase insurance policies, which will cover them in such situations.

One can never expect anything that might arise in the future. Regardless of company’s operation performance, it is possible for the owner to sell the ownership due to bankruptcy or liquidation, involuntary dissolution for shareholder disputes, or even worse yet, death or incapability. For maximum protection, company owners can buy insurance policies and such circumstances will be covered.

If you are planning to prepare your own buy-sell agreement, make sure that you have written legal forms signed by you. Any signed document is legally binding, so consult with your own accountant or lawyer when in doubt. For easy downloadable forms, go online and search for Free Legal Forms and you should be able to find many general legal forms and documents such as bill of sale, realtor buy sell agreement and power of attorney.