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Why Buy-Sell Agreements make Good Business Sense

Wednesday, June 23rd, 2010

A business is largely dependant on its owners for its survival. So it is only fair that the owners will be concerned with the fate of the business in case something was to happen to the owner. One would want to ensure continuity of ownership and management without having to compromise on the business in any way. A fail-safe guarantee is a well-drafted buy-sell agreement. Think of it as a pre-martial agreement or even a will between business owners. Such a buyout agreement, between co-owners of a business is binding on the signees. Its purpose is to govern any situation, in relation to the owner, that can cause distress to the business.
The most important part of such an agreement is the listing of trigger events, or specific situations that will cause a mandatory or optional buyout of an owner’s interest.
These trigger events usually include;
Death: This is a universal clause in almost all buy-sell agreements. In the event of an owner’s death, the entity or the surviving shareholders have the obligation to purchase the interest of the deceased.
Disability: In case of an owner’s disability, after a defined period of time, the corporation can have a defined right or obligation, to purchase the disabled employee’s shares.
Sellout to a third party: The buy-sell agreement should specify the terms under which a potential sale can be presented to the co-owners of the business.
Retirement of an owner: The owner’s retirement will usually result in a mandatory buyout of the business, after deciding on the valuation methods and payment terms.
Owner’s divorce or bankruptcy: In either event, the business is liable to be subjected to outsider interference. As a safety measure, the co-owners should include a clause that forces the affected owner to sell either shares or the entity itself, after deciding on the valuation methods and payment terms.
Keeping these major trigger events in mind, a well-drafted buy-sell agreement will provide reasonable and workable solutions for your business.