Buy–sell agreement

A buy–sell agreement, also known as a buyout agreement, is a legally binding agreement between co-owners of a business that governs the situation if a co-owner dies or is otherwise forced to leave the business, or chooses to leave the business.^[1]

It may be thought of as a sort of premarital agreement between business partners/shareholders or is sometimes called a "business will". An insured buy–sell agreement (triggered buyout is funded with life insurance on the participating owners' lives) is often recommended by business-succession specialists and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.

Clauses

A buy–sell agreement consists of several legally binding clauses in a business partnership or operating agreement or a separate, freestanding agreement, and controls the following business decisions:

Who can buy a departing partner's or shareholder's share of the business (this may include outsiders or be limited to other partners/shareholders);
What events will trigger a buyout, (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and;
What price will be paid for a partner's or shareholder's interest in the partnership and so on.

Buy–sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy–sell arrangement, the service of a corporate trustee is recommended.

References

↑ de Frutos, M.-A. and Kittsteiner, T. (2008), Efficient partnership dissolution under buy-sell clauses. The RAND Journal of Economics, 39: 184–198. doi: 10.1111/j.1756-2171.2008.00009.x

Private equity and venture capital

Basic investment types

History

Terms and concepts

Buyout	Financial sponsor Management buyout Divisional buyout Buy–sell agreement Leveraged recapitalization Dividend recapitalization

Venture	Angel investor Business incubator Post-money valuation Pre-money valuation Seed money Startup company Venture capital financing Venture debt Venture round

Structure	Private equity firms and funds Limited partnership Limited liability company Carried interest Management fee Publicly traded private equity Business Development Company Venture capital trust Private investment in public equity (PIPE) Pledge fund

Investors

Related financial terms

Private equity and venture capital investors
Private equity firms
Venture capital firms
Angel investors
Portfolio companies

Corporate finance and investment banking

Capital structure

Transactions
(terms / conditions)

Equity offerings	At-the-market offering Book building Bookrunner Corporate spin-off Equity carve-out Follow-on offering Greenshoe Reverse Initial public offering Private placement Public offering Rights issue Seasoned equity offering Secondary market offering Underwriting

Mergers and acquisitions	Buy side Control premium Demerger Divestment Drag-along right Management due diligence Managerial entrenchment Minority discount Pitch book Pre-emption right Proxy fight Post-merger integration Sell side Shareholder rights plan Special situation Squeeze out Staggered board of directors Stock swap Super-majority amendment Tag-along right Takeover Reverse Tender offer

Leverage	Debt restructuring Debtor-in-possession financing Financial sponsor Leveraged buyout Leveraged recapitalization High-yield debt Private equity Project finance

Valuation

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