What Does Buy-Sell Agreement Mean?
A buy-sell agreement is a legally binding contract between the shareholders and/or partners (owners) of a business that restricts the transfer of their ownership interest to third parties. It provides an orderly succession plan for the ownership and management of a business in the event an owner wants out.
Divestopedia Explains Buy-Sell Agreement
A buy-sell agreement should exist in every private company with multiple owners as it establishes the exit rules. When a co-owner chooses to leave the business or is otherwise forced to leave, a buy-sell agreement specifies who is allowed to buy the departing owner's shares (outsiders or other owners), which events will trigger a buyout (retirement, death, disability, irreconcilable differences, etc.), and what price will be paid for the outgoing owner's interest (repurchase or cross purchase).
Life circumstances, such as disability, can be tough to deal with, which is why the buy-sell agreement is so important. It typically has a number of contractual features that protects the outgoing owner, such as setting the valuation formula and establishing a funding mechanism and terms of payment (could be an insurance policy). In addition, the buy-sell agreement protects the other owners because it restricts who can buy in. The outgoing owner can't just sell to anyone outside the company, but rather has to offer the stock first back to the company for a buy-back and/or to insiders who have a first right to the stock.