A buy/sell agreement is an agreement among partners or stockholders in which some agree to buy out the interests of others upon some event.
For example, John and Jim are in partnership and John passes away. His share of the property passes to his family and suddenly Jim has a bunch of partners he’s never planned on. These new partners may have an entirely different agenda than the one originally planned by John and Jim.
If there’s a buy/sell agreement in place, Jim has the right to buy out John’s share from John’s heirs. Jim, his plans, and his assets are protected.
The buy/sell agreement doesn’t have to be a large document. All the necessary details can be covered in four or five paragraphs or certainly within a page or two. The agreement can be funded by life insurance so that a payment can be immediately made to the survivor’s family. The survivors don’t have to wait until the property sells to acquire the funds they desire. Life insurance also provides liquidity for the partnership.
The buy/sell agreement should be put in place at the beginning of the partnership or joint venture. It can be part of the original partnership agreement or it can be a separate agreement.
It should cover the “four D’s.” These are:
• Death
• Disability
• Divorce
• Departure
In the event that any one of the “four Ds” occurs to a partner, the buy/sell agreement is in force. The other partners can exercise their right to buy out that share of the property. It’s a sound policy for all involved.
Divorces can wreak havoc on the family’s personal life, but they can have the same effect on a partnership or joint venture. Avoid the problem with a buy/sell agreement stipulating that upon a voluntary or involuntary divorce, the agreement kicks in immediately. The partners buy out the divorcing partner’s interest at a fair market price. This eliminates the possibility of having to deal with those unplanned partners before the situation arises. You can also stipulate that once the divorce becomes final, the partner has the right to buy back into the partnership for the same amount. This technique isn’t a means to take advantage of an unfortunate situation. It’s a way to allow a partner to get out of the partnership to deal with personal issues and let him or her back in at a later time. The value of the partnership is never brought into the divorce process.
It’s a good idea to review the buy/sell agreement at your annual meeting. Property values change, so you should change the buy out amount accordingly. If there are a number of properties involved, you can use a line item for each one.
Find out if a buy/Sell Agreement is right for you.
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