Private Sale Agreement: Everything You Need to Know

A private sale agreement refers to a legally binding agreement that establishes the price at which an entity may sell their business interests.3 min read

A private sale agreement refers to a legally binding agreement that establishes the price at which an entity may sell their business interests. They are also known as a:

  • Buy-sell agreement.
  • Buyout agreement.
  • Business continuation agreement.

Such an agreement protects the business from loss of revenue and can be used to cover the expense of finding and training replacements.

They can be created as separate agreements, or certain provisions (that address buy-sell issues) can be included in the operating agreement of a business.

No matter the format used, the agreement must clearly identify potential buyers, the conditions governing the sale, and any limitations or restrictions.

By agreeing to the terms of the agreement, owners enter into a contract that transfers their business interests to potential buyers once a specific event occurs. Examples of such events include resignation or termination of employment, loss of professional license, criminal conviction, personal insolvency or bankruptcy, retirement, long-term disability, and death.

Uses of a Buy-Sell Agreement

A well-drafted buy-sell agreement creates a ready market for the disposal of business interests, establishes a mutually beneficial price, and provides the cash needed to complete the purchase of the business.

Buy-sell agreements are particularly useful in estate planning since they can be used to fix the purchase price of the business as its taxable value. If the agreement indicates death as the triggering event, it can help reduce the burden of estate tax on the deceased's heirs.

The agreement also provides an estate with ready liquidity for payment of taxes and expenses since the funding is typically arranged during the execution of the agreement.

Cross-Purchase Agreement

This type of agreement provides key employees with the opportunity to buy off the business interests of a disabled or deceased key employee. Each employee takes out an insurance policy on every other key employee. To be effective, cross-purchase agreements are usually used in small companies with a negligible number of key employees.

Stock-Redemption Agreement

These are formal agreements between a business and each of its key employees, where the business agrees to buy the stock of said employees in the event of their death. The agreement usually stipulates that the key employees exchange their ownership interest for an equivalent value in cash. A stock-redemption agreement establishes the market value for the company shares held by employees.

Determining the Purchase Price

Buy-sell agreements should explicitly state the purchase price or stipulate a formula for determining the purchase price. If the agreement does not stipulate the purchase price in advance, it could result in lawsuits and lengthy disputes when the event that triggers the buyback of ownership interests occurs.

For buy-sell agreements involving family members, proof should be provided that the transaction was entered into for legitimate business purposes and is equivalent to one between unrelated people.

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