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A buy-and-sell agreement is a legally binding contract that protects both a business and its co-owners when one of the owners dies, becomes disabled, retired or wishes to exit the company. It ensures continuity, avoids conflict, and provides a clear mechanism for transferring ownership under agreed-upon terms.
In essence, this agreement sets out how a departing shareholder's interest will be valued and who may purchase it, typically the remaining shareholders or the company itself. Without such an agreement, the surviving owners could find themselves in business with a deceased partner's heirs or a third party who has no interest or experience in the business.
A buy-and-sell agreement can be structured in several ways. Commonly, each shareholder takes out a life insurance policy on the other's life. When one passes away, the policy proceeds fund the purchase of their shares, ensuring a smooth transfer without placing financial strain on the business. The same principle can apply in the event of permanent disability or retirement.
Beyond protecting ownership, the agreement provides certainty for all parties involved. It helps determine a fair market valuation method, outlines payment terms, and prevents disputes during emotionally or financially difficult times.
In short, a buy-and-sell agreement is both a financial planning and succession tool. It gives business owners peace of mind that the company they built will remain stable and that their families will receive fair value for their shares.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
