Buy-Sell Agreements: What should trigger it?

by Adam Lappin

There are normally five (5) different events that trigger a buy-sell agreement (also known as a buyout agreement) to be put into use: if a shareholder quits, retires, gets fired, becomes disabled, or dies.  Each triggering event has different issues that could arise that makes a buy-sell agreement paramount to avoid harm and uncertainty to the company. Quit:  A shareholder may quit for a variety of reasons.  A buy-sell agreement provides a mechanism for the company or other shareholders to purchase the shares if a shareholder quits.  It can also layout how the pricing will work, which could be important depending on the reason the shareholder is leaving.  For instance, maybe the shareholder wants to quit to start up his or her own competing company.  By paying the departing shareholder full price, you are financing the competition that much more.  A buy-sell agreement can factor why a shareholder is quitting into how much money per share they receive.

Fired:  Sometimes it can be difficult to fire a fellow shareholder, and normally tensions are high once it happens.  A buy-sell agreement can give the company the right to purchase the departing shareholder’s shares.  It also eliminates the potential of the departing shareholder benefiting from the future success of the company.  From the shareholder’s standpoint, it can at least ensure that his or her shares will have a market and an agreed upon price.

Disabled:  The company may want to purchase back shares when it is apparent that the disabled shareholder can no longer provide benefit to the company.  Defining disability is important when creating the buy-sell agreement because it could mean a vast variety of things.

Retires:  Does the retiring shareholder get to keep his or her shares, sell them back, or have the option?  The buy-sell agreement can eliminate the cloudiness of what happens once retirement comes.

Dies:  For estate tax purposes, a buy-sell agreement gives the deceased shareholder’s estate a determined value for the shares.  This is important so the estate and the company do not have to deal with the guessing game of an independent valuation.  The corporation can also ensure that the shares be sold back to the company or its other shareholders.  This eliminates the possibility of the family inheriting the shares then wanting say the company’s decisions.

My next blog will examine who can purchase the ownership shares.