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A buy-sell agreement generally happens between to business associates when one wants to buy the other out of the company. There are many reasons that contribute to this. Death, divorce, bankruptcy and retirement are just a few. Most buy-sell agreements are attached to the insurance policy on one of the partners. This means that the insurance company is giving one partner the money to buy the other partners interests in the company.
Buy-sell agreements are generally funded by an insurance policy. The policy or policies (depending on the situation) can be obtained many different ways. The first is called cross ownership. This is when the business associates hold policies against each other. The next is Discretionary trust. This is when a trustee holds the policy on behalf of the owners. Next is Principal ownership. This is when the owner holds a policy on themselves. Last is company ownership. This is when the company holds the policies on behalf of the owners. Legal advice is generally needed for clients to determine what is best for them and their interests.
A buy-sell agreement is a binding contract between two people when done. Certain terms of the agreement should be listed so that all parts are clear to everyone. This generally includes a calculation of what the business is worth when the buy-sell agreement takes place. This can be the actual appraised worth, the book worth, a price agreed upon by both parties or a price based on the company's profits. All of this should be stated in the buy-sell agreement. When in doubt, ask an attorney.
No matter what prompts a buy-sell agreement, they are not to be taken lightly. They are essentially a fancy way of saying that you are buying someone out. Feelings can be hurt but in the long run the company will survive.
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