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.