Organizing a new business can be an exciting, and no one in the midst of this adventure wants to contemplate any change to a business plan whose completion that probably required several months of dedicated effort. Unfortunately, the future is infamously uncertain, and unexpected events can cause significant stress for even a well-organized business. Among the most stressful events are a deep disagreement between investors or officers or the unexpected resignation or death of a principal. Having a well-drafted buy-sell agreement in place before any of these ill winds begins to blow can be the difference between a smooth transfer of ownership or a paralyzing conflict that prevents the business from taking necessary actions to ensure continuity of management and operation.
What is a buy-sell agreement?
A buy-sell agreement is a contract between the investors in a business that specifies the events that either permit or force a shareholder to dispose of his stake in the company. A buy-sell agreement should, at the very least, contain a list of conditions that allow the company to force the sale of a dissenting shareholder’s stock to the company. These events often include the death or total disability of a shareholder, an irreconcilable difference in management of the company, conviction of a felony, bankruptcy of the shareholder or a divorce.
Divorce is on the list of triggering events because the transfer of shares may become a term in the decree dissolving the marriage and dividing marital property. Without a valid buy-sell, the remaining shareholders may be forced to accept the former spouse of the divorcing shareholder, and like many forced marriages, the new arrangement may not be a happy one.
Key terms in a buy-sell agreement
Apart from identifying the events that can trigger a sale of stock by one or more shareholder, the most important provision in a buy-sell agreement is the clause that sets the price for the shares of the departing shareholder. The price can be set in many different ways, but perhaps the fairest method is to allow the company to choose an appraiser and the departing shareholder (or his estate) to choose another appraiser, then letting the two appraisers choose a third appraiser, with value being determined by the vote of a majority of appraisers.
A buy-sell agreement should also specify the terms and mechanics of payment. Usually, the payment is made in installments with security for payment provided by a lien on one or more corporate assets.
Buy-sell agreements can be very complex contracts. The services of a knowledgeable business lawyer can be essential to crafting an enforceable agreement that serves the interests of the corporation, the remaining shareholders, and the selling shareholder.