Buy-Sell Agreements

A General Introduction to Buy-Sell Agreements

by Jeffrey A. Duling, Esq.

What is a Buy-Sell Agreement?

A buy-sell agreement is an agreement whereby the owners of a company and the company itself come to an understanding as to how the owners' interests may be sold or transferred.

Why Enter into a Buy-Sell Agreement?

Buy-sell agreements give assurance to the owners of businesses—usually closely-held businesses—that they will know and have control over who their partners are in the future. They also provide mechanisms for owners to remove themselves from the business and liquidate their interests. Owners also have the assurance that their interests will provide for their families when they have passed.

What is Covered in a Buy-Sell Agreement?

First, the triggering events of a buy-sell agreement are outlined. These are the events under which the owner's interest may, or must, be sold. These provisions may include retirement, disability, death, emergency or simply the desire to leave the company.

Second, the agreement will specify who is to purchase the agreement. This will usually be the company, the remaining owners or a combination of the two.

Third, the valuation of the company is determined. There are a multitude of various options available. As a general rule it is desirable to set a mechanism for determining value that is clear and accurately reflects the value of the owner's interest. Fixed values, book values and appraised values are a representative group of possible means of evaluation. Each has its pros and cons and the appropriate system for any given agreement is dependent on the specific facts and circumstances.

Fourth, the agreement will specify the timing of options, sales and payments. A buy-sell agreement often specifies time periods for making decisions, for arranging financing and for providing payments to the selling party.

The final and most often overlooked aspect is the means by which the company or remaining owners will pay for the departing owner's interest. A buy-sell without a viable funding mechanism is virtually worthless. There are numerous ways of funding these plans. You can create cash or liquid asset accounts; you can purchase insurance policies either individually owned or corporately owned; you can create privatized annuities; and, you can arrange for installment plans. Additionally, there are corporate structuring options that may aid in these arrangements.

The Bottom Line.

A well drafted buy-sell agreement provides security and predictability for the owners of a business. They will be assured of their future partners as well as being assured of the liquidity of their interests. The agreement will accomplish these goals while minimizing strife and discord. Additionally, the agreement will have as little impact on the operation of the business as is possible.