What is a buy-sell agreement?

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What is a buy-sell agreement?

45838872 - successful business deal - real estate agent and new female homeowner exchanging house key while shaking hands over a contract of house sale.

A buy-sell agreement is an agreement that sets the terms under which an owner’s interest in a closely held business is purchased upon his death. There are two basic types—a “cross purchase agreement,” where the surviving owners are the buyers, and an “entity agreement,” where the business itself buys out the decedent’s interest.

A main purpose of buy-sell agreements is to provide a continuous transfer and operation of the business after the death of one of the owners. With a buy-sell agreement, a deceased owner’s family can receive cash or other liquid assets in lieu of receiving a non-marketable business interest.

This is no small point. In some states, for example, an owner of less than 50% interest in the business has no right to compel the liquidation of the corporation, selling its assets. In such a scenario, if the stock does not pay dividends, the business interest could have, in substance, an economic value of zero to the beneficiary! A buy-sell agreement changes this, and could mean the difference of leaving one’s family with, effectively, nothing, or a golden parachute.