Does My Business Need ( Or Need To Update ) A Buy-Sell Agreement ?
By : Katie S . Riles - RBE Attorney
When a business has more than one owner , we usually recommend that the owners and the company enter into a buy-sell agreement . A buy-sell agreement is an agreement that contains the terms and conditions upon which the owners of the company are required or authorized to sell their ownership interests in that company . These agreements can be in the form of a stand-alone document , such as a Shareholders Agreement , or incorporated into the terms of another agreement to which the company and the owners are subject , such as an Operating Agreement .
A good buy-sell agreement will serve several purposes . Primarily , it will provide for the orderly transfer of ownership :
( a ) in the event an owner desires to sell or transfer their ownership interests ; or
( b ) upon the occurrence of certain pre-determined events where the parties believe it would be in the best interest of all owners and the business to require that an owner do so .
It will also give the parties control over who can become an owner , thereby preventing unwanted parties , such as ex-spouses , from becoming co-owners . A buy-sell agreement should also reduce the likelihood of disputes over a business ’ s value when an owner exits , which is a common source of contention among the parties to such a transaction .
There are four primary components to a buy-sell agreement :
1 . the events that trigger the application of the buy-sell provisions ( which are often referred to as “ triggering events ”), such as death , divorce or bankruptcy , disability or incapacity , or termination of employment or retirement ;
2 . the parties who have the option or obligation to purchase the ownership interest upon the occurrence of a triggering event , who are usually the other co-owners and the company ;
3 . the price at which the ownership interest can or must be purchased , which is usually determined in reference to a formula ; and
4 . the payment terms for the purchase price , including the timing , number of payments , and interest rate , if any .
While a generic buy-sell agreement is usually better than no agreement , we advise our clients to carefully consider each of these components before entering into a buy-sell agreement . This is because the terms that are beneficial to one company and its owners are unlikely to be a perfect fit for another . For example , a third-generation familyowned business may desire the free transfer of ownership interests among family members while a technology start-up may want to prevent such transfers , retaining the ownership among only key employees . We also advise our clients to review and consider updating their existing buy-sell agreements , from time to time , as their businesses and ownership changes .
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Riley Bennett Egloff LLP - July 2021