What is a Buy/Sell Option Agreement?

A Buy/Sell Option Agreement is an agreement between co-owners of a business granting each other options to buy or sell their respective interests upon the occurrence of specified Option Events. The Option Events are typically:

  • the Death of a co-owner;
  • the Permanent Disablement of a co-owner;
  • Serious Illness/Trauma in connection with a co-owner such that they are no longer able to continue to work in the business; and
  • the Retirement or Expulsion of a co-owner (although these circumstances would ordinarily be dealt with in a Shareholders’ Agreement/Partnership Agreement if one existed for the business).

Enforceable Buy/Sell Option Agreements overcome disputes in relation to the buy out of a co-owner’s interest in a business including in relation to:

  • rights to buy or sell,
  • valuations of interests,
  • timing of payments, and
  • funding arrangements.

Funding Agreements are frequently entered into in connection Buy/Sell Option Agreements and provide for the funding of the price for a co-owner’s share in the event that an option to buy or sell is exercised. Funding is usually provided by:

  • the maintenance of personal insurances in respect of the co-owenrs,
  • agreements in the form of vendor finance, or
  • a combination of each.

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By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)

Sam Roberts