Prepare For The Future With A Buy-Sell Agreement

November 2012       Download PDF      Print

Buy-sell agreements enable business owners to plan their company's future and prepare for unexpected events. These agreements may assign ownership, set mechanisms for valuing a company's shares, dictate buyout terms and outline how the company is to be managed. These detailed plans help eliminate surprises and minimize potential disagreements down the line that could have a profound impact on the success of a business.

Keeping it inside

Businesses often draft buy-sell agreements to prevent owners from selling their stakes to outside partners or to restrict share ownership transfer upon a shareholder's early departure from the company. An agreement can require that an owner who wants to sell to someone outside the company gives remaining shareholders the right of first refusal, or an option to buy the shares at a certain price. In a sense, this can prevent a shareholder from selling their shares to an outside party unless the other current owners allow the transfer, thus accepting the new partner.

Buy-sell agreements also may set up a succession plan to go into effect when an owner retires, dies, withdraws or has his or her ownership terminated for certain causes. When owners die, their shares pass through their estates to their beneficiaries. If there is no buy-sell agreement, beneficiaries can choose what to do with their shares. They may elect to sell them back, and could dispute the share's value. The beneficiaries could choose instead to sell to an outsider or to keep the shares and take an active role in the business. Unexpected ownership transfers can easily create conflict between individuals who make daily business decisions or disrupt the chemistry of a management team.

Buy-sell agreements can protect remaining shareholders by requiring them or the company to buy back shares from the deceased owner's beneficiaries at a predetermined price per share. Proper preparation for these events can also help eliminate tax liabilities when the company redeems shares of a deceased owner.

Other valuable functions

Buy-sell agreements may also discuss:

  • Owner compensation, work benefits and retirement benefits
  • The percentage of shareholder votes required to approve major decisions
  • Methods for resolving owner disagreements and disputes including provisions for the departure of shareholders and procedures for enforced share sales
  • Shareholders' responsibility to lend the company money if it can't find conventional financing to buy back shares

Advisors can assist business owners in drafting buy-sell agreements and, with the help of a financial expert, can help ensure that every owner's interests are represented fairly. A qualified financial expert can help establish the mechanisms in the agreement for determining share value, further ensuring that the agreement will hold up in court if a dispute ever escalates to litigation.

Whether a company is still in the planning stages, has been in business for years or is combining with another company, it's a good time to consider drafting a buy-sell agreement. This document can help shareholders prepare for many potential issues and avoid dispute.