Free Entity Purchase Buy-Sell Agreement Template

In the dynamic world of business, ownership changes are inevitable. Whether due to retirement, death, disability, or other triggering events, the transition of ownership can significantly impact the stability and continuity of a business. This is where Entity Purchase Agreements (EPAs) come into play. In this comprehensive guide, we’ll delve into what EPAs entail, how they operate, crucial considerations, establishment procedures, key components, benefits, stakeholders who require EPAs, why they are necessary, and final thoughts on their significance..

1. What Is an Entity Purchase Agreement?

An Entity Purchase Agreement (EPA), also known as a Stock Redemption Agreement or Entity Buyout Agreement, is a legal contract between a business entity and its owners (shareholders, members, or partners). It outlines the terms and conditions for the business to repurchase the ownership interests of a departing owner in the event of specified triggering events. Unlike cross purchase agreements where individual owners buy each other’s shares, in an EPA, the business entity itself buys back the shares of a departing owner.

2. The Operation of an Entity Purchase Agreement

The operation of an EPA is straightforward yet crucial for maintaining business continuity and ownership control. When a triggering event occurs, such as the death, disability, retirement, or voluntary exit of an owner, the agreement is activated. The business entity then purchases the ownership interests of the departing owner using funds allocated for this purpose. Once the transaction is completed, the ownership interests are redistributed among the remaining owners or retained by the business as treasury shares.

For instance, consider a closely-held corporation with three shareholders: Alice, Bob, and Charlie. They enter into an EPA that stipulates if Alice decides to retire, the corporation will repurchase her shares at fair market value. Upon Alice’s retirement, the corporation uses its available funds to buy back her shares, ensuring that ownership control remains within the corporation and the remaining shareholders.

3. Important Things to Take Into Account in an Entity Purchase Agreement

Establishing an EPA requires careful consideration of various factors to ensure the agreement’s effectiveness and fairness to all parties involved. Here are some important things to take into account:

Valuation Methods: Determine the valuation methods to be used for pricing the ownership interests of the departing owner. Common valuation methods include book value, fair market value, or a predetermined formula based on earnings or assets. It’s essential to select a method that accurately reflects the true value of the business.

Funding Mechanisms: Establish funding mechanisms to facilitate the repurchase of ownership interests by the business entity. This may involve setting aside funds from profits, obtaining financing arrangements, or implementing insurance policies, such as key person insurance or stock redemption life insurance, to provide liquidity for the buyout.

Triggering Events: Clearly define triggering events that would activate the EPA, such as death, disability, retirement, or voluntary exit of an owner. Specify how these events will be verified and what actions will be taken by the business entity in response to each event.

Transfer Restrictions: Implement transfer restrictions to control the transferability of ownership interests and protect the business entity from unwanted ownership changes. This may include rights of first refusal, restrictions on transferring shares to outsiders, or approval requirements for transfers.

Dispute Resolution: Include provisions for resolving disputes that may arise under the EPA, such as arbitration or mediation clauses, to avoid costly litigation and ensure smooth execution of the agreement.

4. How Do You Establish an Entity Purchase Agreement?

Establishing an EPA involves several key steps to ensure that the agreement is comprehensive, legally sound, and tailored to the specific needs of the business and its owners. Here’s how you can establish an EPA:

Identify Parties and Ownership Interests: Begin by identifying all parties involved in the agreement, including the business entity and its owners (shareholders, members, or partners). Determine the ownership interests held by each party and their respective roles in the business.

Consult Legal Professionals: Seek guidance from legal professionals experienced in business agreements, such as attorneys or corporate advisors, to draft the EPA. They can provide valuable insights and ensure that the agreement complies with relevant laws and regulations.

Draft the Agreement: Work with legal professionals to draft the EPA, incorporating the necessary clauses and provisions based on the specific needs and circumstances of the business. Ensure that the agreement is clear, concise, and legally enforceable.

Review and Negotiate: Review the draft EPA with all parties involved and negotiate any terms or provisions that require clarification or modification. It’s essential to ensure that all parties fully understand and agree to the terms of the agreement before finalizing it.

Execute the Agreement: Once all parties have agreed to the terms of the EPA, execute the agreement by signing it. Make sure to retain copies of the signed agreement for the records of all parties involved.

5. What Information Needs to Be in an Entity Purchase Agreement?

An EPA should include the following key information to ensure clarity, fairness, and enforceability:

Parties Involved: Identify the business entity and its owners (shareholders, members, or partners) who are party to the agreement.

Ownership Interests: Specify the ownership interests held by each party and their respective percentages or shares in the business.

Triggering Events: Clearly define triggering events that would activate the EPA, such as death, disability, retirement, or voluntary exit of an owner.

Valuation Methods: Determine the valuation methods to be used for pricing the ownership interests of the departing owner.

Funding Mechanisms: Establish funding mechanisms to facilitate the repurchase of ownership interests by the business entity.

Transfer Restrictions: Implement transfer restrictions to control the transferability of ownership interests and protect the business entity from unwanted ownership changes.

Dispute Resolution: Include provisions for resolving disputes that may arise under the EPA, such as arbitration or mediation clauses.

6. How to Create an Entity Purchase Agreement

Creating an Entity Purchase Agreement (EPA) requires careful consideration of various elements to ensure that the agreement effectively addresses the needs and objectives of the parties involved. Below, are the key sections typically included in an EPA along with sample language for each section:

1. Introduction and Parties:

Begin by introducing the agreement and identifying the parties involved, including the business entity and its owners (shareholders, members, or partners). 

Sample: “This Entity Purchase Agreement (“Agreement”) is made and entered into as of [Date], by and among [Name of Business Entity], a [Type of Entity, e.g., corporation, LLC, partnership] organized and existing under the laws of [State/Country] (the “Company”), and the undersigned shareholders/members/partners of the Company (collectively referred to as the “Sellers”).”

2. Recitals:

Provide background information and set out the intentions of the parties. 

Sample: “Whereas, the Sellers collectively own [Percentage] of the outstanding shares/membership interests/partnership interests of the Company; Whereas, the Sellers desire to establish a mechanism for the purchase and sale of their respective shares/membership interests/partnership interests in the event of certain triggering events; Whereas, the Company desires to facilitate the orderly purchase and redemption of the Sellers’ shares/membership interests/partnership interests upon the occurrence of such triggering events;”

3. Definitions:

Define key terms used throughout the agreement to ensure clarity and consistency. 

Sample: “Agreement” means this Entity Purchase Agreement and all schedules, exhibits, and attachments hereto. “Sellers” means the shareholders/members/partners of the Company who are party to this Agreement. “Triggering Events” means events such as death, disability, retirement, or voluntary exit of a Seller as specified in this Agreement.”

4. Purchase and Sale of Interests:

Outline the process for the purchase and sale of ownership interests in the Company.

 Sample: “Upon the occurrence of a triggering event, the Company shall have the option, but not the obligation, to purchase and redeem the shares/membership interests/partnership interests of the affected Seller at a price determined in accordance with the valuation method set forth herein. The affected Seller hereby agrees to sell, transfer, and assign all of their shares/membership interests/partnership interests in the Company to the Company or its designated purchaser(s) upon the occurrence of a triggering event.”

5. Valuation Method:

Specify the method used to determine the purchase price of the ownership interests. 

Sample: “The purchase price for the shares/membership interests/partnership interests subject to redemption under this Agreement shall be determined based on [Specify Valuation Method, e.g., fair market value, book value, predetermined formula]. The valuation of the shares/membership interests/partnership interests shall be conducted by [Specify Appraiser or Valuation Firm], whose determination of value shall be final and binding upon the parties hereto.”

6. Funding Mechanism:

Establish the funding mechanism for the purchase and redemption of ownership interests. 

Sample: “The Company shall establish a sinking fund for the purpose of funding the purchase and redemption of shares/membership interests/partnership interests under this Agreement. The sinking fund shall be funded through [Specify Funding Mechanism, e.g., periodic contributions from profits, life insurance policies on the lives of the Sellers, external financing arrangements].”

7. Closing and Payment:

Set out the procedures for closing the purchase and sale of ownership interests and the payment of the purchase price. 

Sample: “Upon the occurrence of a triggering event, the closing of the purchase and sale of shares/membership interests/partnership interests shall take place within [Specify Timeframe, e.g., 30 days] following the receipt of notice from the affected Seller or their legal representative. The purchase price shall be paid to the affected Seller or their legal representative in cash or by certified funds at the closing.”

8. Transfer Restrictions:

Impose restrictions on the transferability of ownership interests. 

Sample: “No Seller shall transfer, assign, pledge, or encumber their shares/membership interests/partnership interests in the Company except as permitted under this Agreement. Any purported transfer or assignment of shares/membership interests/partnership interests in violation of this Agreement shall be null and void.”

9. Governing Law and Jurisdiction:

Specify the governing law and jurisdiction applicable to the Agreement. 

Sample: “This Agreement shall be governed by and construed in accordance with the laws of [State/Country], without regard to its conflicts of laws principles. Any dispute arising under or relating to this Agreement shall be subject to the exclusive jurisdiction of the courts of [State/Country].”

10. Signatures:

Provide space for the parties to sign and execute the Agreement. 

Sample: “IN WITNESS WHEREOF, the parties hereto have executed this Entity Purchase Agreement as of the date first above written.”

7. What Makes an Entity Purchase Agreement Beneficial?

EPAs offer several benefits for businesses and their owners, including:

Business Continuity: EPAs ensure that ownership transitions are managed smoothly, preserving business continuity and minimizing disruptions to operations.

Ownership Control: EPAs help maintain ownership control within the business entity by repurchasing the ownership interests of departing owners.

Fair Valuation: EPAs establish fair valuation methods for pricing the ownership interests of departing owners, ensuring that all parties are treated equitably.

Funding Flexibility: EPAs provide flexibility in funding the repurchase of ownership interests, allowing businesses to use available funds or obtain financing arrangements.

Dispute Resolution: EPAs include provisions for resolving disputes that may arise under the agreement, helping to minimize conflicts and ensure smooth execution.

8. Who Requires an Entity Purchase Agreement?

Any business with multiple owners or shareholders can benefit from an EPA to manage ownership transitions and protect the interests of stakeholders. This includes corporations, partnerships, limited liability companies (LLCs), and other business entities.

9. Why Are Entity Purchase Agreements Necessary?

EPAs are necessary for several reasons:

Ownership Transitions: EPAs provide a structured framework for managing ownership transitions due to triggering events such as death, disability, retirement, or voluntary exit.

Ownership Control: EPAs help maintain ownership control within the business entity by repurchasing the ownership interests of departing owners, preventing unwanted outsiders from gaining influence.

Fair Valuation: EPAs establish fair valuation methods for pricing the ownership interests of departing owners, ensuring that all parties are treated equitably.

Business Continuity: EPAs ensure that ownership transitions are managed smoothly, preserving business continuity and minimizing disruptions to operations.

Stakeholder Protection: EPAs protect the interests of stakeholders by providing clarity and structure in the event of ownership changes, reducing the likelihood of conflicts and disputes.

Final Thoughts

Entity Purchase Agreements are indispensable tools for businesses with multiple owners or shareholders, providing a roadmap for managing ownership transitions and protecting stakeholders’ interests. By carefully considering key factors such as valuation methods, funding mechanisms, triggering events, transfer restrictions, and dispute resolution procedures, businesses can ensure that their EPAs are comprehensive, effective, and tailored to their specific needs. Utilize our free EPA template to safeguard your business’s future and ensure smooth ownership transitions for years to come. Take action now to protect your business and its stakeholders with a well-crafted EPA.