What would happen to your business if an active owner of your business leaves or is unable to work? Becomes disabled? Sells shares to an outsider? Dies? Divorces and is required to transfer shares to their former spouse? A good Buy-Sell Agreement creates a plan for how to deal with these disruptive events. A Buy-Sell Agreement can also help create a buyer for shares of a closely held company.
Buy-Sells allow you to control who owns your company. Before an owner can sell shares, the other shareholders and/or the company get a “right of first refusal” to purchase those shares. A right of first refusal also protects from forced transfers resulting from divorce decrees or personal bankruptcy.
Buy-Sells also create a plan for dealing with catastrophic situations like death and disability. In the middle of stressful situations, shareholders may disagree about what needs to be done and whether a particular shareholder should be bought out and at what price. A good Buy-Sell establishes a default plan outlining what happens in a variety of circumstances.
Buy-Sells can include a mechanisms for resolving disputes between shareholders. For example, you could require mediation or confidential arbitration instead of an expensive public lawsuit.
Buy-Sells can also include confidentiality and noncompete provisions to protect your confidential information and to restrict an owners ability to compete against the business.
Finally, Buy-Sells are also part of most estate planning and succession plans. Establishing a value for a closely held business can be difficult and subjective. A Buy-Sell agreement can help establish a share value which can be very useful when doing estate planning.
In one way, a Buy-Sell Agreement is like life insurance: you may hope you won’t have to use it, but it becomes extremely important if you do.© 2013 Varnum LLP