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Planning for the unexpected with buy-sell agreements

| Apr 19, 2021 | Uncategorized |

Getting a business off on solid footing requires not only hard work, investment resources and marketing research, but also planning, both for future growth and potential scenarios that could put the business at financial risk. Having a contingency plan in place in the event of a partner’s departure from the company due to life circumstances, illness or death is vitally important for the future viability of the business.

Businesses that are not sole proprietorships often will include many important documents that are part of entity formation. The inclusion of a well-crafted buy-sell agreement will keep the business stabilized if a partner or owner leaves. Utah county and American Fork entrepreneurs who desire a solid foundation for their business may benefit from sound legal counsel on how to draw up important documents that will set things up from the start.

What makes a good buy-sell agreement

Also called a “buyout”, a buy-sell agreement is a contract made between shareholders that limits a shareholder’s actions in the sale or transfer of shares if they leave the company. It does not cover the purchase or sale of the company. By limiting the actions of the departing shareholder, the company and other shareholders will not face the complications or instability that could occur if the shareholder leaves.

A few contingencies that a good buyout agreement should contain include:

  • whether or not the company will buy out the departing shareholder
  • if so, who may buy out the shareholder’s stock
  • the valuation of the shareholder’s interest
  • the payout terms.

Such an agreement not only clarifies in writing how the shareholder may dispose of their ownership interest in the company, but it also protects the company from the risk of an unwanted buyer obtaining an interest.

The agreement should also identify what events will trigger a buyout of a shareholder, which may include the shareholder’s:

  • termination of employment
  • personal bankruptcy
  • divorce
  • disability
  • retirement or death.

 Handling the buyout

The buy-sell agreement should also stipulate how the company will finance the buyout. This may include the direct payment of the transaction with a portion of the company’s assets and repayment of the balance back with income earned over time. Buyouts are commonly funded through life insurance policies as well.

Although buy-sell agreements can be stand-alone documents, they are often included in the business articles of confederation or bylaws.