A buy-sell agreement can be in its own written agreement or can be a provision in a limited liability company operating agreement or a corporate shareholder agreement. A buy-sell agreement sets forth procedures for the purchase of the ownership interest of an owner/member/shareholder/partner of a closely held business by the company itself or the remaining owners that is triggered by certain events or conditions detailed further below.
What are the events that may/can trigger the buy-sell procedures?
- Retirement
- Disability
- Bankruptcy
- Divorce
- Death
- Termination/Forcing out of an owner from the company
A buy-sell agreement should provide for the following:
- What are the triggering events?
- Who is buying the interest? The company (redemption) or the remaining owners (cross-purchase).
- When is the price determined? Some agreements have a previously agreed upon price while other provisions prescribed the valuation method to be used at the time of the purchase. If the calculation is determined at the time of the agreement, then is there an agreement to periodically revisit or update this valuation?
- Source of funds for the purchase (ex. Life insurance policies on partners purchased by the company or policies owners have taken out on each other).
- Tax considerations or consequences of purchase.
Benefits of buy-sell provisions:
- Provides liquidity to the estate of an owner in the event of the owner’s death.
- Prevents an ex-spouse in a divorce from taking ownership and control of the business.
- Prevents bankruptcy trustee or owner’s estate from selling the interest to a third party without the approval of the remaining owners.
- Can establish the value of the transfer for the purposes of gift or estate tax (make sure to vet with a licensed CPA).
Make sure to engage an experienced business attorney and licensed CPA when negotiating and entering into a Buy-Sell Agreement or an agreement that has a Buy-Sell provision. The valuation agreed upon and structure can have unwanted tax consequences if not discussed ahead of time.
Roberts Law, PLLC is happy to assist business owners that are getting started, getting in compliance, or growing. Contact us for a free consultation to discuss your needs and how we can help your business run smoothly.
Kelly Roberts is a business and bankruptcy attorney at Roberts Law, PLLC with over a decade of experience assisting business and business owners to navigate contracts, partnership structures, negotiations, and dispute resolution. Kelly earned her Juris Doctorate from the University of Miami School of Law.
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