Free Buy-Sell (Buyout) Agreement Template

What Is a Buy-Sell Agreement?

A buy-sell agreement, also known as a buyout agreement, outlines what happens to a co-owner’s shares if they leave the company. This document provides terms for unforeseen circumstances, including an owner’s death, bankruptcy, retirement, or disability. It sets the methods for purchase prices, rights of refusal, and disputes related to ownership transfers.

Use our free buy-sell agreement template to protect your business. Our customizable agreement allows you to set your terms.

When to Use a Buy-Sell Agreement

A buy-sell agreement details what happens when an owner leaves a company, but it’s important to write one beforehand. Business owners often draft this agreement at the beginning of the company’s creation, when the LLC operating agreement or partnership agreement is written. A buy-sell agreement is helpful in many situations, such as:

• Controlling who can buy interest: The terms of a buyout agreement outline who can and can’t buy business shares. It also gives owners the right of first refusal, allowing them to block third parties from purchasing ownership.
• Preparing for an owner’s death or disability: An owner’s death or disability can cause uncertainty. Before these events occur, you can outline the next steps and transfer processes.
• Establishing remedies before disputes occur: Business ownership disputes may become complicated, so outlining solutions beforehand is helpful. Determine how to handle disputes and claims in your buy-sell agreement.
• Protecting company interests in a divorce: Your buy-sell agreement can allow the company to buy interests lost in a divorce.
• Business continuity planning: Keeping your business as stable as possible is essential. A buy-sell agreement aids continuity planning by offering methods for maintaining ownership and preventing new or third-party owners.

Types of Buy-Sell Agreements

A buyout agreement can take many forms, depending on its purpose and the owners’ preferences. Understanding each type of agreement helps you decide which is best for your company. Compare the following options for buying out an ownership interest:

• Cross-purchase: Each remaining partner agrees to buy out the partner who is leaving or has passed. Typically, the partners use a life insurance policy to fund this purchase if the owner passes away.
• Redemption (entity-purchase): If the company can act as an entity, it can buy back the leaving partner’s shares. In the case of a partner’s death, the company may be a beneficiary of a life insurance policy to fund this purchase.
• Wait-and-see: The wait-and-see agreement allows business owners to postpone the choice between a redemption and a cross-purchase. At the time of death or departure, the remaining partners can determine how to buy the available interests.
• Cross endorsement: A cross-endorsement is a cross-purchase agreement in which each business owner buys a life insurance policy on the others. Each partner pays a premium for a policy and is listed as a beneficiary.
• One-way: In this agreement, the owner agrees to sell their interest to one designated buyer; typically, a family member or employee. The buyer does not have to sell their interest back to the partners, making it a one-way obligation.

How to Create a Buy-Sell Agreement

Writing a buy-sell agreement requires you and your partners to make many important decisions. Understanding what terms, guidelines, and information to include helps create an effective document. Use the following steps to write your agreement:

1. Describe the company: Record the company’s registered name and business type. Select whether your business is a corporation, LLC, or partnership.
2. List the owners: List each owner’s legal name, types of interest, and number of interests.
3. Determine the purpose: Select a purpose for the agreement, such as restricting interest transfers, maintaining stability, or creating a market for owners. This provides context about why the terms should be enforced.
4. Outline permitted transfers: List interest transfer scenarios unaffected by the buy-sell agreement. Common permitted transfers include selling to current owners or immediate family.
5. Set transfer of interest guidelines: Name one partner to hold the right of first refusal if the leaving partner sells their shares to a third party. Also, select what will happen to any interests that remain after the first refusal process.
6. Duties of Transferees: Agree upon whether the buyer must sign an adoption agreement. This makes them part of the original buy-sell terms and regulates their ability to sell their shares at a later date.
7. Determine involuntary transfer processes: Involuntary transfer refers to transfer caused by death, disability, termination of employment, or bankruptcy. Choose whether the company, the owners, or a combination will purchase involuntary transfers.
8. Set the purchase price: Choose whether the interests will be sold at a set price, book price, fair market value, or value determined by an appraiser. Include procedures for deciding on the identity of the appraiser. Add any desired provisions for the sale, price, and payment method.
9. Decide on the duration: Note the events or dates that will cause the buy-sell agreement to terminate. This may include the consent of the majority, the death of all owners, or company bankruptcy.
10. Determine how to handle disputes: Select whether disputes will be resolved via litigation, arbitration, mediation, or a combination of methods. Also, provide which state jurisdiction will oversee disputes and which state the agreement operates under.

Sample Buy-Sell Agreement

View the free sample buy-sell agreement below for the correct formatting and content. Our downloadable forms are available in PDF and Word format, so you can protect your company and set transfer terms for owners.