Understanding buy-sell agreements

On Behalf of | Jan 3, 2024 | Business |

When two or more people decide to form a business enterprise, they hope it will last forever. Unhappily, this expectation is often frustrated by unexpected events such as death, disability, divorce, bankruptcy and other events. The best way to plan for such events is to draft and execute a buy-sell agreement.

The basics of a buy-sell agreement

In its most basic form, a buy-sell agreement is a contract between among the owners of stock in a corporation or shares in a partnership that governs the disposition of a shareholder’s or partner’s interest upon the occurrence of one or more specified events. These events, usually called “trigger events,” can include any event chosen by the parties to the agreement, including the death or disability of a party to the agreement, the divorce of a party, the bankruptcy of a party, or similar events.

The buy-sell agreement also specifies the mechanics of paying for and transferring the shares of the departing shareholder or partner.

Which form?

Buy-sell agreements usually work in one of two ways. The entity can purchase the shares or interest of the departing member, or the remaining members of the entity can collectively purchase the department member’s interest.

The choice of method usually depends upon the wishes of the parties to the agreement unless other factors are present, such as a loan that has come due.

Determining the price for the departing party’s interest

The departing shareholder or partner deserves compensation for his or her interest. In a well-drafted buy-sell agreement, provision is usually made for determining the price of that interest and for accumulating sufficient liquid assets, usually cash, to pay the departing member for his or her interest.

Again, the exact method of payment can be determined by the parties to the agreement.

A way to avoid litigation

Many time-consuming and expensive cases of business litigation come about because the business leadership neglected to have a plan in place to deal with how changes in the owners’ lives might affect the business. A buy-sell agreement can help a business weather these changes with relative ease.

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