5 Elements of a Buy-Sell Agreement

Buy-sell agreements are commonly used in businesses with multiple owners for future planning purposes. More specifically, the co-owners of the business use these legally binding contracts to predetermine what will happen to an owner’s share of the business if they leave the business due to retirement, illness, death, or other personal reasons.

Setting up a clear plan should a co-owner exit the business is critical to protecting the continuation of business operations in the future. You can rely on an Aventura business transaction attorney at Kramer Green to review and draft all your business contracts in a way that best benefits your business. Here are five major elements that all buy-sell agreements should contain.

  1. The agreement should clearly identify all parties and their respective interests in the business.

  2. The buy-sell agreement should define what events trigger the application of the agreement, such as death, divorce, retirement, incapacity due to illness or injury, etc.

In some cases, all the relevant events may trigger the application of the agreement. In other cases, the nature of the event at issue may change what occurs. For instance, the death of a co-owner may have a different set of results under the buy-sell agreement than the retirement of a co-owner. Likewise, the misconduct of a co-owner may result in entirely different consequences, such as a forced sale of that co-owner’s share rather than the incapacity of a co-owner due to illness.

  1. The agreement should contain a valuation clause that lays out the accepted value price or purchase price formula by which a co-owner can purchase the share of a departing co-owner.

A valuation clause helps avoid disputes about valuing a co-owner’s share when a buy-sell agreement goes into effect or the need to pay for an expensive business appraisal or valuation. If the price or purchase price formula is already set up front, it leaves less room for potentially costly legal disputes. The agreement also may establish payment terms and schedules and a mechanism by which the remaining co-owners can deviate from those terms if they choose.

  1. The agreement should identify the eligible buyers of the co-owner’s share and any priority of those buyers over one another.

The agreement should specifically define who is eligible to “buy out” the departing co-owner’s share and who has priority to purchase the share if more than one person has the right to purchase the share. The agreement also should state whether the option to purchase is completely voluntary or, if the intention is to avoid unwanted third parties from becoming involved in the business, mandatory.

  1. The agreement should set forth the details of the process by which the buyout should occur.

Buy-sell agreements can take different forms. The most common types of these agreements are stock-redemption agreements and cross-purchase agreements. In a stock-redemption agreement, when a triggering event occurs, such as the death of a co-owner, the shares can be sold back to the company itself. In many cases, this type of agreement is contingent on the proceeds of a life insurance policy in exchange for the value of the shares.

In a cross-purchase agreement, other co-owners generally are required to purchase the interests of the departing co-owner. Again, a life insurance or disability policy of the deceased or disabled co-owner may fund this transaction.

A buy-sell agreement may also be a hybrid agreement in that it incorporates aspects of both agreements. These agreements often include an option for shareholders and companies to acquire shares when a triggering event under the agreement occurs. Determining whether to choose stock-redemption or cross-purchase of the shares occurs later.

Let Us Help Protect Your Legal Interests Today

A Hallandale business transaction attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. stands ready to help protect your legal interests as you seek to build your business and protect your future business operations through a buy-sell agreement. We understand how hard you have worked to build your business, and our goal is to protect and advocate for you and your business to the greatest extent possible. Contact our office today at (954) 966-2112 or reach out to us online to schedule a time to discuss your business law matter with our attorneys.

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