Wednesday, July 18, 2018

BUY-SELL AGREEMENTS

What happens if a founder/shareholder/owner/partner dies or leaves your company? 

Can a crisis be made worse by a clumsy, unplanned leadership succession?

  1.  A buy-sell agreement is essential, just like a captain on a ship. No one can absolutely assure that a ship will stay afloat during a storm, but the captain has that job. It is essential to assure that the captain is in command of the ship at all times (because a storm can arise at all times).  For the remaining active owners and their business to have a good chance of making it through an owner's a death or other unplanned departure, a buy-sell agreement lays out in advance who is in charge.

  2.  Accordingly, a business owner should always use a buy-sell contract along with an estate plan. Just as the assets of the estate are ideally never left in a legal limbo like probate, a business owner should prescribe who is in control upon such owner's eventual death and what then should happen immediately.
  3. Business management continuity begins when you originally establish the ownership interests in the first place, which is absolutely the best time to establish what occurs on a future ownership change because that is when the ownership rights are themselves defined or limited.  Despite a complete change of ownership, with sufficient forethought and preparation the business management continuity can be achieved or preserved. 
  4. A buy-sell agreement often gets the parties to set out an agreed upon price or valuation method in advance, which sometimes creates motivation for shareholders similar to a pseudo-market for the ownership interest. Further, the buy-sell agreement can set a departing shareholder’s valuation for purposes of mandatory redemptions or specified mandatory liquidity events so that a buyout can be a frendly occasion and free of disputes. 
  5. The terms of a buy-sell can be tailored to a variety of situations, opportunities or requirements.