A buy and sell agreement is a contract that regulates the rights of business owners regarding the transfer of ownership interests for a company. In a buy and sell agreement, the owners agree in advance how the ownership interests of an owner may be transferred if that owner dies, sells, or otherwise leaves the business.

It is important to have buy and sell agreements in place—not just because they provide necessary protection in the event that an owner needs to leave the business—but also because they can offer clarity when disagreements occur.

By establishing the conditions and the price at which an owner can sell his or her interest allows disputes to be avoided or settled quickly and efficiently. This could prevent large disagreements which could cause trouble with the partnership or even create a situation of insolvency.

The two types of buy and sell agreements are cross-purchase and entity-purchase (redemption). In cross-purchase agreements, when an owner dies or decides to leave the company, the remaining owners will purchase that owner’s interests in the company. Redemption agreements establish that the company itself will buy a departing owner’s interests back from that owner.

Depending on the particular circumstances, some buy and sell agreements may have a combination of both types of agreements.

The buy and sell agreement can also help determine the value of the business when it comes time to execute the sale of interests. Especially when the leaving owner and the buying owners disagree on the value of the business. The buy and sell agreement can help provide details about factors to consider when determining the value, such as financial statements, income, and total liabilities.

It is important to include in the agreement a mixture of situations that may occur when an ownership interest needs to be sold. It might include areas such as death, disability, departure due to infidelity, retirement, or bankruptcy.

The inclusion of a buy and sell agreement can prove beneficial to the company, especially when there is no good method of resolving disagreements between owners. This contract should be in place both before and sometimes after the agreement, as amendments may be necessary as the business and owners evolve.