The buy-sell agreement is one of the most important elements of any partnership, operating or shareholder agreement.
A buy-sell agreement is intended to forestall problems where a business owner could suddenly find him- or herself in business with someone other than his or her original business partner. In essence, it specifies the terms of a buyout, by either the company or the remaining business owner(s), of the “departing” owner’s interest in the business, usually covering such events as death, divorce, disability, retirement, voluntary departure from the business, or intent on selling the interest in the business to a third party (so called right of first refusal).
The two primary structures for buy/sell agreements are cross-purchase agreements, in which the remaining owner(s) buy the “departing” owner’s interest, and the redemption agreement, in which the company itself buys the interest of the departing owner. Buy-sell agreements also specify how the purchase price of the interest is determined, and terms of payment. Life insurance policies are the more typical instruments employed to ensure that funds are available for these buyout transactions.