Plan for the Future of Your Business with a Buy/Sell Agreement

Thursday, January 4, 2007
Contributed by: James Wester

If you are like most good business people, you are planning ahead. Part of that plan should include an appropriate buy/sell agreement, which can be worth its weight in gold in preventing disputes before they occur. At some point, one or more owners of a business will leave the business for some reason. Planning for their departure can avoid problems and promote a more harmonious business relationship.

In considering a buy/sell agreement, the following, while not an exhaustive list, are some of the more common questions or issues that you should consider:

  1. Should the agreement be structured as the company acquiring the interest or as a cross-purchase agreement by the owners?
  2. Should the agreement be structured:
    • As an affirmative obligation to sell and buy?
    • As an option for either the buyer or the seller?
    • As a right of first refusal?
    • Otherwise or a combination of the above?
  3. Should the death or disability of an owner trigger a buyout of the owner's interest?
  4. Should the agreement apply to both current owners and any future owners?
  5. Will the agreement be reviewed annually to address any changes in the value of the business or any other terms? Will the value be established ever 3 years or 5 years?
  6. Should the buyout price allow for the payment of the price over time? If yes, what length of time and what interest rate?
  7. Should the terms of the buyout differ depending upon the circumstance triggering the buyout?
  8. Should the buyout price apply to a disabled owner be addressed?
  9. Should the buyout price apply an owner who resigns or is dismissed?
  10. Should the buyout price apply to an owner who goes bankrupt be addressed?
  11. Should the buyout be funded by life insurance or some other vehicle? If so, should the type of life insurance used be addressed?
  12. Should all of the life insurance policy proceeds be required to be used to purchase the interest?
  13. Should part of the proceeds be used to help the entity recover from the loss of the owner?
  14. Should whole life insurance policies with cash values be transferred to the owner at termination or retirement?
  15. Should the disposition of owners' loans, whether receivables or payables, be addressed?
  16. Should there be a period of disability before the other owners of the business have the right to buy out a disabled owner? How is a disability defined?
  17. Should an owner have the right to transfer or assign to a trust, for estate-tax planning purposes, their rights and interests in the business?
  18. Should the spouses of the owners sign the agreement?
  19. Should the agreement supersede all other agreements?
  20. How does the acquisition of additional interest impact the control or voting rights of the remaining owners?
  21. Should there be a covenant not to compete? If so, what are the market, geographic and time limitations?

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.