Facts about the Buy Sell Agreement template

What is a Buy-Sell Agreement?

Business owners want to protect their individual and collective interests should something happen to one of them, such as bankruptcy, death or divorce. The document describes how to handle business shares that a departing partner or owner leaves behind. Also known as a "buyout," the buyout agreement provides a blueprint for how the remaining business owners can transfer or offer their shares for sale. The document's principal goal is to establish a framework for managing and controlling a business.

Besides owners, buy-sell agreements also explain how a company should proceed if something happens to the sole proprietor. Much like how married couples want to protect their financial health with a prenuptial agreement, the same mindset applies with a buy-sell contract; business owners do not want to leave themselves vulnerable if something happens to one of them that sends ripples throughout the entire company structure.

General items and scenarios often included in the document include the company name, events that "activate" the agreement, death of a shareholder or an owner, long-term disability or illness, divorce of an owner or shareholder, personal bankruptcy, early buyout, retirement and payment structure. Agreements may also include a right of first refusal and events that terminate the contract, such as the death of all shareholders or the dissolution of the company.

What is a Buy-Sell Agreement used for?

A buy sell arrangement provides business owners and partners with clarity regarding navigating sweeping changes. At its core, the formal agreement should meet a company's needs and protect the owner's interest and business interest. With the contract in place, owners prepare for the execution of the agreement by purchasing life insurance policies, which also happens with businesses with a sole proprietor who wants to leave the company to an heir or employee. Owners insure each other or the company; if anything happens to one of them, the remaining partners use the death benefit to buy the shareholder's shares and give the deceased owner's family the share's valuation price.

Why should you use a Buy-Sell Agreement?

No matter if a business only has two partners or owners, a catastrophic event that befalls one may reduce a company to rubble. Without a buy-sell contract, if one owner dies or divorces, her or his business shares go to an heir, ex-spouse or next of kin. That person could drive the business into the ground or make decisions out of alignment with the current company culture. Another benefit of such documents is that they provide and protect ownership interest liquidity, offering partners and owners access to cash if they ever sell shares or retire. Further, the agreement puts a price on shares, making it easy to valuate a departing partner's shares.

How to write a Buy-Sell Agreement

To maximize effectiveness, business partners and owners must craft buy-sell documents properly. Here are the agreement's most essential elements:

  • What happens if an owner wants out: Business owners should decide how to handle a departing owner's shares and how much advance notice a partner must give before departing. Owners should also decide whether to make purchasing a life insurance policy mandatory and if they want to bring in third-party buyers.
  • Purchase price and value of the company: Certified Public Accountants help determine a company's most-current value and its future value.
  • What happens if an owner involuntarily loses control of a business share: Death and divorce may send a business into a tailspin, making it essential that partners account for common events that put business shares at risk. Buy-sell contracts may stipulate that the remaining owners have the first option to buy, or that owners declaring personal bankruptcy must give notice before doing so.
  • Payment options: Besides thinking about payment options for potential purchasers, business partners must decide how much future purchasers must pay down for shares. Buy-sell documents may specify how long purchasers have to pay for shares in full, whether to apply interest and how long purchasers have until they make their first payment.

How to Fill Out a Buy-Sell Agreement with PDFSimpli in Five Steps

Because of the many nuances and considerations common to buy-sell agreements, it is good to create one with a template. Here are five steps to drafting a contract:

  • 1. Prepare:

    Business partners must ensure that they have all the essential details and information before drafting a buy-sell agreement. This may require valuating the business, gathering life insurance information, thinking about what may jeopardize the company's stability and discussing options for handling disagreements among owners.

  • 2. Choose a Software:

    Standard PDF editors and word processors may not have the tools necessary to create a solid contract. Something as simple as saving a document may become a hurdle with a PDF editor. PDFSimpli software makes it easy for users to start their buy-sell contract and complete it as they see fit. The program offers a free trial period, which gives users access to all its tools.

  • 3. Fill Out or Edit the Buy-Sell Agreement:

    Users easily make the agreement template their own with PDFSimpli's customization tools, which make it easy to type in the desired text by selecting open boxes or replace existing text with the "text" and "erase" tools.

  • 4. Review:

    After filling out the full agreement, all partners should look it over to make sure that it includes all necessary information. All legal names, addresses and dates require accuracy. Partners should also get everything in place to execute the terms of the agreement in case disaster strikes sooner than expected.

  • 5. Download, Save, Print or Send for Signature:

    After a thorough review, it is time to save and download the final draft of the buy-sell agreement. All partners should have a digital or hard copy of the contract, and they should add their signatures. PDFSimpli lets users sign documents by drawing, uploading or typing their signature into the necessary fields.

Buy-Sell Agreement Frequently Asked Questions

Companies with a single owner may find little use for a standard buy-sell agreement. Instead, solo owners can use a one-way buy-sell agreement that gives a designated buyer the right of first refusal on the business sale. Assets that the business generates become a means of paying off remaining business debts before the chosen buyer takes care of the remaining value. The buyer takes out a life or disability insurance policy on the owner to buy the company if the single owner divorces, dies or becomes disabled.

Just as engaged couples create a prenuptial agreement before they marry, business owners should do the same when creating buy-sell documents. By drafting a contract soon after establishing a business, partners take advantage of their high spirits and plan for misfortune. Waiting to create an agreement may jeopardize the business's success and stability. Another reason to create the agreement soon after setting up the business is so the contract always meets the owners' most-current needs. Over time, partners may need to adjust the document to account for impending marriage or divorce or declining health.

Without a buy-sell contract, a court may order a company to dismantle and sell off assets to compensate the new owner for the business's full value, known as "a partition by sale." A court may also designate an owner's ex-spouse, estate heir or someone similar as a new owner. This decision may spell the beginning of the end for the organization if the agreement does not stipulate that a court-appointed owner does not have to sell her or his shares back to the company.