Templates and Checklists


Buy-Sell Agreement Template



Douglas Bean
by Douglas Bean, J.D.

A "buy/sell" agreement, or a buyout agreement is a common contract between owners of a business. It provides for the sale of an Owner’s shares in a variety of common situations: death of an owner, retirement, bankruptcy, unresolved conflicts with other owners, etc.

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BUY-SELL AGREEMENT

This Buy-Sell Agreement (this "Agreement") is made effective as of _____________ 20XX (the "Effective Date"), between and among [INSERT COMPANY NAME] (the "Company") and each of the individuals listed on the attached Schedule A (each an "Owner", and collectively, the "Owners").

The Owners own all of the outstanding capital units of the Company (the "Units"), and desire to promote and protect their mutual interests and the interests of the Company. Therefore, the parties hereby agree as follows:

Article I - Sales and Transfers

1. General Transfer Restriction. No Owner (or any party acting on behalf of an Owner) may sell or transfer any of such Owner's Units, whether now owned or later acquired, except in accordance with the terms of this Agreement or by the written consent of the Company and all of the other Owners. Any attempted sale or transfer of any Units (or any interest in any Units) that violates the terms of this Agreement shall be void and shall not be binding upon, or recognized by, the Company or the Owners.

  • a. Sale or Transfer Defined. The phrase "sale or transfer" includes any sale, pledge, encumbrance, gift, bequest, or other transfer of any Units, whether or not the transfer would be made (I) for value, or (II) to another Owner, or (III) voluntarily or involuntarily or by operation of law, or (IV) during an Owner's lifetime or upon an Owner's death.
  • b. Sale or Transfer Exception. The phrase "sale or transfer" does not include Owner's transfer into a self-settled trust for estate planning purposes.

2. Permitted Voluntary Sale or Transfer During Lifetime.

  • a. Any Owner may voluntarily sell or transfer such Owners Units subject to the restrictions set out in this paragraph 2. The selling owner will provide written notice of their intention to voluntarily transfer their Ownership Units to each other Owner.
  • b. First Option to Other Owners. Each of the other Owners shall have thirty (30) days from the effective date of such notice during which such other Owners must elect to buy the Offered Units in proportion to their respective ownership of all outstanding Units (excluding the Offered Units) or in such other proportion upon which the other Owners agree. Such other Owners shall acquire such Units at the purchase price and on the payment terms described in Articles II and III below.

3. Involuntary Lifetime Disposition/Termination of Employment. Any Owner with knowledge of a possible Involuntary Lifetime Disposition (defined below) must promptly provide written notice to each of the other Owners describing the nature and details of the Involuntary Lifetime Disposition, as well as each involved party (the "Third Party Transferee"). The Owner shall be deemed to have offered to sell such Owner's Units (the "Offered Units") to the other Owners.

  • a. Involuntary Lifetime Disposition. An "Involuntary Lifetime Disposition" occurs when an Owner's Units, or any portion or interest in them, are involuntarily sold, transferred or otherwise disposed of, or an involuntary sale, transfer or disposal is threatened by any third person, whether by (I) sale upon the execution or in foreclosure of any pledge, hypothecation, lien or charge, or (II) acquisition of an interest in such Units by a trustee in bankruptcy or a receiver, or (III) any other means (but not including the death of the Owner or any purchase by the Other Owners pursuant to the other sections of this Agreement), or (IV) court adjudication of Owner incompetency, or (V) the appointment of a guardian or conservator for an Owner (unless the Owner is a Disabled Employee, as defined below in Article I(4)(a), or (VI) a court order denying the Owner sole ownership of the Owner's Units in connection with a property division in a divorce proceeding.
  • b. First Option to Other Owners. Each of the other Owners shall have thirty (30) days from the effective date of such notice during which such other Owners must elect to buy the Offered Units in proportion to their respective ownership of all outstanding Units (excluding the Offered Units) or in such other proportion upon which the other Owners agree. Such other Owners shall acquire such Units at the purchase price and on the payment terms described in Articles II and III below.

4. Termination of Employment. If any Owner is employed by the Company (an "Employee-Owner") and ceases to be an employee of the Company because the Employee-Owner is a Disabled Employee (see below), or for any other reason, then such Owner shall be deemed to have offered to sell all of his or her Units (the "Offered Units") to the Other Owners for the Purchase Price and on the Payment Terms described in Articles II and III below. Further, each other Owner shall agree to buy all of the Offered Units of the selling Employee-Owner in proportion to his or her respective ownership of all outstanding Units (excluding the Offered Units), or in such other proportion upon which the other Owners may agree. Such offer shall be deemed made on the date such Employee-Owner ceased to be an employee of the Company. This provision does not apply to early retirement as discussed below.

  • a. Disabled Employee. An Employee-Owner is a "Disabled Employee" when such person is (I) under a legal decree of incompetency, or (II) eligible for benefits for more than 50% disability under any group or individual disability insurance policy (as confirmed by an insurance company), or (III) unable to perform substantially all of his or her regular duties for a period which is reasonably expected to last at least 180 substantially consecutive days, as determined by an examining physician, to which examination each Employee-Owner hereby consents.
  • b. Early Retirement. If the Employee-Owner voluntarily retires prior to age [INSERT NUMBER OF YEARS] years, or if the Employee-Owner has not given the Company at least five (5) years' prior written notice of his or her intention to leave the Company's employ, the Purchase Price shall be reduced by [INSERT AMOUNT] percent from the amount otherwise determined in Article II below.

5. Death of an Owner. Upon the death of an Owner, his or her Personal Representative (see paragraph 5.a below) will immediately be deemed to have offered to sell to the other Owners all of the deceased Owner's Units (the "Offered Units") at the Purchase Price and on the Payment Terms described in Articles II and III below. Each such other Owner shall accept such offer and agree to buy such Offered Units in proportion to his or her respective ownership of all outstanding Units (excluding the Offered Units), or in such other proportion upon which the other Owners may agree. Notwithstanding the actual closing date specified in Article III, Section 2, the transfer of the Units shall be deemed effective at the close of business day of the deceased Owner's death.

a. Personal Representative. A Seller's "Personal Representative" includes any administrator, personal representative, executor or trustee who has legal responsibility for managing and disposing of the Seller's Units. It also includes any person who succeeds in interest to such Units, if no such fiduciary has control over such Units.

Optional Paragraph 5 – Death of an Owner - One-Way Buyout (see explanatory notes below)

5. Death of an Owner – One-Way Buyout. Upon the death of an [INSERT NAME OF OWNER], his or her ownership units may be purchased, pursuant to the terms of this agreement by [INSERT NAME OF INDIVIDUAL], and the owner’s Personal Representative (see paragraph 5.a below) will immediately be deemed to have offered to sell to [INSERT NAME OF INDIVIDUAL] all of the deceased Owner's Units (the "Offered Units") at the Purchase Price and on the Payment Terms described in Articles II and III below. Notwithstanding the actual closing date specified in Article III, Section 2, the transfer of the Units shall be deemed effective at the close of business day of the deceased Owner's death.

a. Personal Representative. A Seller's "Personal Representative" includes any administrator, personal representative, executor or trustee who has legal responsibility for managing and disposing of the Seller's Units. It also includes any person who succeeds in interest to such Units, if no such fiduciary has control over such Units.

6. Involuntary Lifetime Transfer/Owner Misconduct. If any action by an Owner (the "Subject Owner") causes or results in any of the following the other Owners may require transfer of Subject Owners’ Units under this paragraph: a) Any actions by an Owner causing or resulting in one of the following: (I) Conviction, whether as a result of a guilty plea, a plea of nolo contendere or a verdict of guilty, of a felony, any offense involving moral turpitude; (II) Material misrepresentation or material false, misleading, inaccurate statements in connection with the rendering of services as an Owner, (III) The willful and continued failure of an Owner to substantially perform that party’s customary duties (other than due to such party’s death or incapacity due to physical or mental illness), the reckless disregard of the performance of such party’s duties, or the willful engaging by the Subject Owner in gross misconduct which is materially injurious to the other Owners or the Company, monetarily or otherwise.

  • a. Determination by Other Owners. A majority of the Ownership Units must vote in favor of requiring a transfer under this section.
  • b. Notice. Upon determination by a majority of the Ownership Units that the Subject Owner will be required to transfer their Ownership Units the Company shall promptly provide written notice to the Subject Owner.
  • c. First Option to Other Owners. Each of the other Owners shall have thirty (30) days from the effective date of such notice during which such other Owners must elect to buy the Offered Units in proportion to their respective ownership of all outstanding Units (excluding the Offered Units) or in such other proportion upon which the other Owners agree. Such other Owners shall acquire such Units at the purchase price and on the payment terms described in Articles II and III below.

7. Option of the Company. The other Owners shall have the option to transfer their collective purchase rights under sections 2, 3, 4, 5 and 6 of this Article I to the Company. The Company shall be bound by the time periods set forth above, the purchase price provisions of Article II, and the payment provisions of Article III. The Company may acquire such amounts of life insurance on the lives of the Owners as it deems appropriate to enable it to purchase Offered Units. The option created under this paragraph may be exercised by a consent to transfer signed by Owners who hold at least [INSERT AMOUNT] percent of the outstanding Units.

Article II - Purchase Price

The "Purchase Price" shall be determined in accordance with the provisions of this Article II, and the payment terms are set forth in Article III.

1. Book Value / Purchase Price. The "Purchase Price" shall be onetimes the "book value" of the Offered Units on the last day of the month most recently ended prior to the date of any deemed offer.

2. Calculation by CPA. The book value of the Offered Units shall be calculated by the independent certified public accountant ("CPA") regularly employed by the Company. If the Company does not have a regularly employed independent CPA, the determination shall be made by an independent CPA selected by the Company for this purpose. The book value shall be calculated in a manner consistent with the Company's regular financial statements and in accordance with generally accepted accounting principles, consistently applied. The Company shall provide such data as the CPA deems necessary or useful to make such determination.

3. Costs. The fees and reimbursed expenses charged by the CPA for the valuation shall be the Company's obligation.

Article III - Payment Terms

1. Type of Payment. The Purchase Price paid for the Offered Units of a deceased Owner shall be paid in cash to the extent of the face amount of the life insurance policies that any Owner buying such Units has maintained under Article V of this Agreement. The remaining portion of the Purchase Price shall be paid in check. However, at the option of each other Owner, the remaining portion may be paid in [INSERT NUMBER OF PAYMENTS] [INSERT NUMBER] equal monthly installments of principal and interest. Such installment payments shall begin on the date of the closing and shall include interest compounded annually at the prime rate as listed in the Wall Street Journal on such closing date. Each other Owner shall give the Seller a negotiable promissory note as evidence of this debt. Such note shall permit the other Owner to prepay all or any part of the principal balance of the note at any time without penalty or premium. Payments shall first be applied to interest. In the event of an inter vivos transaction, the other Owners may exercise their option to buy the Offered Units from the Seller with a down payment of $[INSERT AMOUNT] of the Purchase Price, with consecutive equal monthly installment payments for [INSERT NUMBER] months, due and payable on the first day of each month following the exercise of this option by the other Owners, at a [INSERT INTEREST RATE] % rate of interest.

2. The Closing. The purchase of the Offered Units will take place at a closing at the Company's primary place of business or at any other place and time to which the parties agree. In the case of the death or voluntary retirement of the Seller, the closing shall be held 180 days after the date of the Owner's death or the effective date of retirement. In all other cases, the closing shall be held within thirty days after the date on which (I) the last option to buy is exercised or lapses, or (II) the other Owners last become obligated to buy.

  • a. Delivery of Certificates. At the closing, the other Owners will pay for the Offered Units. The Seller will deliver certificates representing all of the Offered Units, duly endorsed, free and clear of all encumbrances, and with evidence of payment of all necessary transfer taxes and fees.
  • b. Power of Attorney. Each Owner hereby appoints the Company, through its Secretary, as his or her agent and attorney-in-fact to execute and deliver all documents needed to convey his or her Units, if such selling Owner is not present at the closing. This power of attorney is coupled with an interest and does not terminate on the Owner's disability or death, and continues for as long as this Agreement is in effect, so long as the Owner was mentally capable of consenting, and consented, to the transaction, prior to their disability, incapacitation or death.
  • c. Death-Tax Liability. In the case of a sale because of the Seller's death, then notwithstanding any other provision of this Agreement to the contrary, payment for the Offered Units shall not be required until the Personal Representative of the Seller provides a release or other assurances to the reasonable satisfaction of the other Owners that the other Owners are protected from any liability for death taxes related to the Offered Units.
  • d. Escrow of Units. If any portion of the Purchase Price is evidenced by a promissory note, the certificate(s), if any, for such portion or all of the Offered Units shall be endorsed in blank, or accompanied by a duly executed, blank stock power, and delivered, in escrow, to an entity which customarily acts as an escrow agent. The escrow agent shall hold such documents as security for repayment of the promissory note. Upon notice from the other Owners that the promissory note has been paid in full, the escrow agent shall deliver all deposited certificate(s), if any, to the appropriate other Owners.

Article IV - Endorsement of Certificates

Endorsement. Promptly after the date each Owner becomes a party to this Agreement, each Owner shall deliver to the Company's secretary all of his or her certificates. The Company's Secretary shall endorse them as follows:

The sale, assignment, transfer, pledge, or other disposition of the Units represented by this Certificate is restricted by the provisions of a Buy-Sell Agreement dated [INSERT DATE], as amended from time to time, by and among the Owners of [INSERT NAME OF COMPANY] (the "Company"), and with the Company's consent, a copy of which is on file in the Company's office.

Article V - Life Insurance

1. Required Policies. Each Owner will apply for, own, and be the beneficiary of one or more life insurance policies, one policy on the life of each other Owner. Each policy shall have death proceeds payable in an amount that is the greater of (I) the amount reasonably calculated to fully pay for such beneficiary-Owner's prorata share of the insured-Owner's Units at the Purchase Price, as if the insured-Owner died, or (II) the amount listed on Schedule B. Each Owner will take any actions required to maintain in force all of the insurance policies that he or she is required to maintain under this Article, and will not cancel them or allow them to lapse without the prior written consent of each other Owner. All dividends on such policies shall be applied to the payment of premiums.

2. Premiums. [Option 1] Each Owner must pay every life insurance premium required under this Article, and must give each other Owner proof of such payment within fifteen days of the premium due date. Upon failure to provide such proof, any other Owner may pay the premium and be reimbursed by the non-paying Owner.

Optional Paragraph 2 – Premiums (see explanatory notes below)

2. Premiums. [Option 2]: Payment of premiums by the company. The Company will pay every life insurance premium required under this Article, and must give each other Owner proof of such payment within fifteen days of the premium due date. Upon failure to provide such proof, any other Owner may pay the premium and be reimbursed by the Company.

Article VI - Terminating or Amending the Agreement

1. Termination. This Agreement will terminate if the Company is dissolved, put into receivership, or becomes bankrupt. Further, Owners who hold at least [INSERT AMOUNT]percent of the outstanding Units may agree in writing to terminate this Agreement. However, the Owners may not voluntarily terminate this Agreement to the disadvantage of any Owner whose Units have been offered (or deemed offered) for sale, but for which the closing date has not yet occurred.

2. Amendment. This Agreement may be amended upon the written consent of Owners who hold at least [INSERT AMOUNT] percent of the outstanding Units. However, the Owners may not amend this Agreement to the disadvantage of any Owner whose Units have been offered (or deemed offered) for sale, but for which the closing date has not yet occurred.

Article VII - Continuation of Restrictions

This Agreement shall continue to apply to the Units which are the subject of a sale or transfer and to new Units issued by the Company. The transferee shall execute a counterpart signature page to this Agreement. Such signature shall be binding on all Owners and the Company as if the transferee was an original signor.

Article VIII - Miscellaneous

1. Tax Status. If at any time the Company has elected a status for tax purposes that is valid only if the owners are individuals or other types of specified entities, then in order to protect such election, no Owner may sell or transfer any of his or her Units to any person if such sale or transfer might reasonably be expected to result in a termination of such election. No attempted sale or transfer in violation of this paragraph will be valid or recognized by the Company.

2. Binding Effect. This Agreement is binding on and enforceable by and against the parties, their successors, legal representatives, heirs, and assigns.

3. Governing Law. This Agreement will be governed by and construed according to the laws of the State of [INSERT STATE].

4. Severability. If any provision of this Agreement is held to be invalid or unenforceable for any reason, the remaining provisions shall continue to be valid and enforceable. If a court finds that any provision of this Agreement is invalid or unenforceable, but that by limiting such provision it would become valid and enforceable, then such provision shall be deemed to be written, construed, and enforced as so limited.

5. Notices. All notices required or permitted to be given under this Agreement must be given in writing, and will be deemed given when personally delivered or on the third day after mailing by U.S. registered or certified mail, postage prepaid, with return receipt requested. Notice to any Owner is valid if sent to him or her at such Owner's address as it appears in the Company's records.

6. Specific Performance. The Owners agree that the Units are unique and that the failure to perform the obligations under this Agreement will result in irreparable damage to the other parties. Further, the Owners agree that specific performance of these obligations may be obtained by a lawsuit in equity.

7. Waiver. Any party's failure to insist on compliance or enforcement of any provision of this Agreement shall not affect its validity or enforceability or constitute a waiver of future enforcement of that provision or of any other provision of this Agreement.

8. Entire Agreement. This Agreement constitutes the entire agreement of the Owners among themselves or with the Company regarding the subject matter of this Agreement and supersedes all prior agreements regarding such subject matter.

9. Effectiveness. This Agreement shall become effective when signed by all of the Owners listed on Schedule A and by [INSERT NAME OF COMPANY REPRESENTATIVE] on behalf of [INSERT COMPANY NAME].

___________________________________________

OWNER 1

___________________________________________

OWNER 2

{Insert additional owners as necessary…}

[INSERT COMPANY NAME]

By: ______________________________________



SCHEDULE A

List of Owners

  1. First Owner
  2. Second Owner

(Insert additional owners as necessary…)



SCHEDULE B

Name of Each Owner and Life Insurance Policy Amount

Name of Owner Amount of Policy
_____________________ $0.00


Explanatory Notes

by Douglas Bean, Juris Doctor

Hope is never a good strategy when it comes to business succession planning, and so a well-crafted buy/sell agreement is critical to smooth continuity of the business over the years. Some pitfalls you avoid buy entering this type of agreement are: a) having the business ownership fall into the wrong hands, b) slow down or stopping the business while ownership interests are sorted out in the courts, and c) eliminating unpredictability in the purchase price for shares.

The buy/sell template [above] is designed to deal with the following type of events that may happen to an Owner:

  1. Death
  2. Disability
  3. Divorce
  4. Bankruptcy
  5. Conflict among co-owners
  6. Owners who endanger the business or its reputation
  7. Voluntary departures of Owners

This buy/sell agreement provides for three types of buy/out:

  1. Traditional Cross Purchase: This is a plan where other owners prepare for and will purchase other Owners’ shares under certain circumstances.
  2. Entity Redemption. This agreement provides an option for the Company to purchase shares if the other owners are unable or unwilling to do so.
  3. One-way Purchase. This agreement provides optional language for the case where a sole-owner may want to ensure that a certain individual (family member, key employee, etc.) has the ability to purchase the company on the Owner’s death.

Above, you’ll find a template for a robust buy/sell agreement. Here are some notes and explanations about a few of the most important paragraphs:

  • General Transfer Restriction: This paragraph binds all the parties to the agreement such that they are not able to transfer their ownership outside the confines of the contract. This ensures the other Owners that ownership in the company will follow this contract.
  • Permitted Voluntary Sale During Lifetime: Owners are free to sell their ownership interests under this contract, however, they must first offer their shares ("ownership units”) to the other owners. The other owners may in turn offer their rights to purchase to the Company.
  • Involuntary Lifetime Disposition. One of the key aspects to a buy/sell agreement is to provide for a set of common circumstances that might result in an Owner losing their shares in the Company. Some of these might include: (I) foreclosure (II) bankruptcy or receivership, or (III) court adjudication of Owner incompetency, (IV) the appointment of a guardian or conservator for an Owner, or (V) a divorce proceeding. This paragraph gives the current owners the ability to purchase the shares instead of them being sold to a stranger.
  • Termination of Employment. It may not be in the other Owners’ best interest to have a terminated Employee/Owner continue their ownership in the company. Like the other paragraphs this gives the other Owners the ability to buy the ex-Employees' ownership interest. This includes an employee who is no longer able to participate in the business because of disability.
  • Early Retirement. It may be disadvantageous for an owner to simply retire early and no longer participate in the business. This optional paragraph may be used to deal with this event and includes the ability to discount an Owners buy-out.
  • Death of an Owner. One of the most important parts of a buy/sell agreement are the provisions designed to deal with the death of an owner. Several different approaches may be taken:
  • Other owner buyout. This is the most common buyout option where the other owners use life-insurance to fund their buyout of the deceased Owner’s shares.
  • Optional – One-Way Buyout. Included with this template is an optional "One-Way" buyout paragraph. This is typically used when a sole owner wants to make sure their ownership interest is sold to a specific individual. An example might be if the owner of a small company wants to make sure a key employee is able to buy the business upon the Owner’s death. This buyout is usually funded through a life insurance policy paid for by the key employee.
  • Involuntary Lifetime Transfer/Owner Misconduct. There may be situations where a particular Owner’s behavior is so disruptive to the business, or the business’ reputation, that the other Owner’s want to separate. This paragraph provides for a "forced" sale of the offending Owner’s interest either to the other Owners or to the company.
  • Option of the Company. To provide maximum flexibility in this template a "Company Option" paragraph is included. This paragraph allows any Owner who has a right to purchase shares from another owner to transfer that right to the Company. When the Company chooses to exercise its option the Company becomes the owner of the Ownership Units up for sale.
  • Purchase Price: Article II governs the purchase price any owner (or owner’s estate) will receive for their shares. The price is fixed using the "book value" of the company. This value is determined by a competent CPA, either currently engaged by the company to run its books, or by an independent CPA if none is currently engaged by the company. Providing a method for determining the share purchase price allows for uniformity and fairness across all the buyout scenarios.
  • Payment Terms. Payment under this agreement generally takes the form of a down payment and a promissory note. The promissory note is to be paid over time and is subject to an interest rate you should provide when finalizing this document.
  • Life Insurance. One of the most important parts of a buy/sell agreement is the method by which the purchase of an Owner’s interest are accomplished. Most people normally do not have the liquid cash to purchase an ownership in a company. The solution is usually provided using life insurance. Typically, the Owners maintain life insurance policies on all of the other owners. The premiums are paid by the Owners, or can be paid by the Company. Upon an Owners death the life insurance proceeds are required to be used to purchase the shares of the deceased Owner.