The concept of buy-sell agreements is straightforward. These universal agreements, which exist in nearly all businesses with more than one owner, establish the mechanism for a business, or you, its owner(s), to purchase shares of its stock when certain specified things happen. Our treatment of businesses and business owners is inclusive.
- Business owners are all the parties that own a portion of a business (control or minority interests) and are subject to buy-sell agreements (or perhaps, should be). We use the terms “owner” and “shareholder” as applying to all types of businesses.
- The businesses we refer to include C corporations, S corporations, general and limited partnerships, limited liability corporations, professional corporations, LLCs or partnerships.
We begin our investigation of buy-sell agreements for business owners by asking six ancient questions and offering preliminary comments:
Who are the parties to your buy-sell agreement?
- Normally this will be you and the other shareholders and your company.
- Often, with the passage of time, new shareholders do not become subject to agreements.
What is your buy-sell agreement designed to accomplish?
- Most agreements are designed to specify the manner in which future transactions in your company’s stock will be accomplished when certain future events happen.
- This worthwhile objective is not met when many buy-sell agreements are created.
When will your buy-sell agreement come into play?
- Most agreements are set to operate when certain things, normally unpleasant things like deaths, disabilities or firings happen. They are called “trigger events” for a reason.
- All buy-sell agreements share this – they relate to future events and future circumstances that most of us don’t want to think about in the present.
- Another fact – neither you nor anyone else knows when your buy-sell agreement will be triggered.
- No one knows, when agreements are created, when they will come into play.
Where will you be when your buy-sell agreement is triggered?
- You might still be running the business or not working in the business at all.
- You might be the buying shareholder or the selling shareholder (or you might be the dearly departed whose family is relying upon the buy-sell agreement to work as it was intended).
- Where you will be and what role you will play when the buy-sell agreement is triggered is important as you consider how your agreement will operate.
Why do you have a buy-sell agreement?
- Everyone knows instinctively that it is difficult to reach agreement about important financial matters after something bad happens. At that point, the proverbial ox is in the ditch. That’s why we prepare wills – so our children won’t fight over things or assets when we die.
- Your buy-sell agreement should be designed so that you and the other shareholders can reach agreement, now, before anything happens.
- Chances are that you have a buy-sell agreement because your attorney or another adviser told you it was necessary to have one.
How will your buy-sell agreement operate?
- Buy-sell agreements are designed, in theory at least, to determine the price at which future transactions will occur (those bad things we don’t want to talk about), the process by which that price is established, and the terms under which future transactions will occur.
- In reality, unless your agreement has previously been triggered, the chances are good that you have no idea how it will operate.
If all of these questions were answered appropriately for the majority of buy-sell agreements, then we would not be writing about them. The blunt reality is that the questions above are too often left unanswered or are poorly considered.