eForms Logo

Business Buyout Agreement

0.0 Stars | 0 Ratings
Downloads: 0

Updated June 27, 2026

A business buyout agreement defines the process by which one or more business owners purchase another owner's shares in the company. The agreement must align with the company's bylaws. A management buyout (MBO) agreement is a variation in which employees or managers, rather than owners, purchase shares from an owner.

Business Buyout vs. Buy-Sell

A business buyout occurs in real time, whereas a buy-sell agreement anticipates some future event. The first governs a transaction that’s already been decided on; the latter becomes valid only when something specific happens, such as the death or disability of a business owner.

What to Include in a Business Buyout Agreement

  • Names of signatories
  • Contact information for signatories
  • Precise description of the interest being purchased (i.e., “1,500 shares of Class B common stock of Fast Cars, a California corporation, represented by Stock Certificate No. 007” is better than “John Smith’s shares in Fast Cars”)
  • Any liens or encumbrances
  • Valuation method
  • Valuation date
  • Required approvals and consents
  • Non-compete clause. Some business buyouts contain a non-compete clause that restricts the person who’s selling shares from engaging in similar business activities for a specified period of time (usually 2-5 years) and within a specified geographical area. Enforceability varies by state.

How Are Business Buyouts Taxed?

It depends. Usually, the seller pays capital gains tax on the difference between what they paid for their share(s) and what they get in the buyout. Long-term capital gains rates apply if the seller held onto the interest for longer than a year. Some portions of a buyout, such as payments for inventory, might get taxed as ordinary income.[1][2]

Valuation in a Business Buyout

In a real estate buyout, getting a property valued is pretty straightforward. Valuing shares in a business is a little more complicated because you have to account for such intangible variables as customer relationships and future earning potential. That’s why business buyouts often use formulas to determine a valuation method, such as a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization).

Business Buyout Agreement FAQ

What is cross-purchase? What is redemption? Which is better?

Cross-purchase occurs when an owner or owners of a company purchase a departing owner’s shares directly. Redemption refers to the company itself absorbing the cost of those shares. The Supreme Court ruled in 2024 that redemption increases the value of the company for tax purposes, making cross-purchase a more popular strategy in business buyouts.[3]

What’s the difference between a business buyout and a merger?

A buyout involves one owner purchasing another owner’s shares in a company, so while ownership changes, the company continues operating largely as it did before the buyout. In a merger, though, two companies become one, changing both the ownership and the structure of the company.

Sources

  1. 26 U.S. Code § 1001
  2. IRS Publication 550
  3. Connelly v. United States (2024)