There are two main classes of legally-binding Sale Agreements that are commonly arranged through Accounting Firms: Sale of Shares Agreements and Buy and Sell Agreements.
The Sale Agreement described in the following breakdown of the ‘3 types of Sale Agreement’ (and why you need them) has to do with ‘Buy and Sell’ (or Buy-Sell) Agreements.
Buy and Sell: Essential Sale Agreements to Protect Company Co-Owners:
A buy-sell sale agreement ensures that if one of the co-owners dies, the other co-owner(s) can either buy the deceased party’s (or departed party’s – if they simply want to leave and sell up) shares at an pre-agreed on price, or otherwise retain control of their company.
This stops family members or other beneficiaries becoming shareholders and claiming co-ownership of a company. It also prevents beneficiaries selling off the shares to a third party. Both scenarios place the surviving partner or co-owners of a company at risk, and even the company itself. It can also lead to take-overs of companies and to the original surviving co-owners losing executive control of the company.
These types of sale agreement also protect company co-owners in the event that one, or more, want to transfer their ownership and sell their shares. Under the terms of these agreements, sale of shares must be to the co-owners, either directly, or through the company itself buying the shares. The party leaving the company cannot sell their shares to whomever they choose.
The 3 types of ‘Buy and Sell’ Sale Agreement:
- The Cross-Purchase Agreement:
The Cross-Purchase sale agreement specifies that the surviving co-owner or co-owners purchase the departing or deceased co-owners share at a price specified on the agreement.
- The Redemption Agreement:
This sale agreement pertains to the death of a co-owner.
Through the Redemption Agreement, the departed co-owner’s shares must be sold to the company entity. In this case, the sale agreement is specifically founded on each of the co-owners taking a life insurance policy ensuring that the company will have funds to purchase the shares in the company.
- The Hybrid Agreement:
This type of co-owner sale agreement combines the terms of the above. The Hybrid Agreement specifies that the company and / or the surviving co-owner(s) individually buy the deceased/departing co-owners shares (and interests) in the company.
Partner in a Company? Why you need a ‘buy and sell’ sale agreement:
Perhaps you have set up with a friend. As 50% shareholders, neither of you has plans on going anywhere, and you trust each other. You’ve stood around the braai discussing your partnership and what will happen if one of you loses interest and wants to move on, sell up one day to retire, dies, etc.
Ten years down the line, you have an established business, and everything has been done by the book, but you don’t have a buy-sell agreement in place. You fall out with your partner; they sell their shares to an outside company that has its sights set on company income. They die and leave their o% of your company to their spouse or children. They don’t want the business, but they want the cash, and if you can’t pay what an outside party is offering, half your company could end up in the hands of a stranger/rival.
The possible scenarios are almost endless, and they get more threatening and convoluted the higher up the ‘company-size chain’ you go. Buy and Sell Agreements (along with the insurance policies that ensure remaining co-owners and companies can always buy the departed or leaving party’s shares) are simple sales agreements that remove the particular risk (from simple vulnerability to the risk of hostile ‘take-over’) to a company, its employees, and its co-owners.
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