A buy-sell agreement is a contract between the owners of a business, whereby they agree in advance upon a mechanism to allow for the dissolution of their joint ownership. Under the simplest form of a buy-sell agreement, two equal owners agree that, at either party’s option in the future, one party will set a purchase price for 50% of the business and the other party will have the election to either buy the first party’s ownership interest or sell his ownership interest to the first party.
However, buy-sell agreements can — and in most cases, should — vary greatly from the simple form, in order to fit the unique circumstances of each case. The negotiation of an effective buy-sell agreement must take into consideration questions like:
- Should either party be able to trigger the buy-sell option at any time, or does that right only arise upon the occurrence of a triggering event?
- What protections should be included to ensure that a party who wants to purchase, but has trouble raising the funds in a timely manner, is not forced to sell at a discounted price?
- Should there be minimum or maximum prices?
- What happens to personal guarantees of the shareholder who sells his stock?
- Does a party to the buy-sell agreement have the option to pay the purchase price on any terms other than cash on delivery?
- What happens if a bank loan is automatically thrown into default by the change in ownership?
- How does the pricing mechanism need to be adjusted if the shareholders own different percentages? Should the minority owners’ sale price be adjusted for a “minority discount”?
- What happens to the buy-sell agreement if there are later adjustments to the ownership of the business?
- What happens to the agreement if one owner wants to sell his interest to a third party?
If you are trying to negotiate or enforce at buy-sell agreement, the Private Shareholder Rights lawyers at Powers Taylor LLP can help.