What is it?
In simple terms, a buy-sell agreement, also called a shareholders agreement, is a contract or agreement between the owners and shareholders of a business, used to facilitate the smooth transfer of business ownership interests. It clearly lays out orderly procedures and controls that should be used in the transfer of shareholder interests in the event of specific events such as death, bankruptcy, or retirement of a shareholder. A shareholders agreement is legally binding and signed by all parties involved. Each partner in the business agrees to a cross-purchase, which is, buying another partner’s equity interests in the event they leave the partnership.
Buy-sell agreements are crucial for all kinds of businesses including sole proprietorships, private corporations, joint ventures, and partnerships. This is because the agreement helps to align the interests of both the company and shareholders hence preventing disagreement when it comes to change of ownership or transfer of equity. A Buy-Sell agreement plays a huge role in stabilizing the value of a business by transferring it under specific conditions to the desired party.
For a buy-sell agreement to be reliable and effective, it has to be drafted carefully and professionally so that it balances the interests of all parties involved. The structure and contents of such an agreement vary a lot depends on the number of parties involved, the short term and long term needs of the parties, and the economic consequences. There are of different types of shareholder agreements such as stand-alone, redemption and cross-purchase. They can also take the form of simple provisions included in another agreement in the case of small limited liability businesses. Buy-sell agreement attorney with acquisitions or corporate transaction experience can help to structure a shareholder agreement to make it fit one’s specific needs.
A well-drafted shareholders agreement outlines and defines the specific conditions that will trigger the application of its provisions. As mentioned earlier, such triggers can include bankruptcy, change of ownership, retirement, insolvency, being fired, quitting, incapacitation and death. It also outlines the procedures that should be used to buy or sell equity if the specified events trigger this necessity. This helps to avoid a lot of bureaucracy during transfer of business interests.
Another great benefit of entering into a buy-sell agreement is that includes a funding mechanism. Such agreements can be easily and efficiently effected because they are backed up by a funding mechanism that facilitates the liquidation of equity that is to be transferred. Quick liquidity allows for payment of taxes and debts by heirs in the case of a deceased partner. Equity can also be transferred in the form of a one-time cash payment or buyout over time in the case of a sale. The most common form of funding used nowadays is life insurance.
Some details are lined out.
A shareholder agreement includes the price per share that will be used for transactions in future when the agreement will be used. This is very important since it helps to avoid potential price fluctuations or haggling over the price at the time of transfer. It also allows for the partners to set prices that will not have negative tax effects and economic consequences in the future.
A buy-sell agreement is also the most efficient way to dissolve a sole proprietorship in the event that the owner dies. This is especially important if there is no one to take over the business. Once it is dissolved the agreement will also stipulate the person entitled to the cash which may be close family or a valued employee. In the same case, after dissolution, the agreement can outline how the money will be used to settle debts, taxes or pay employee wages.
Seek out knowledge.
To draft a reliable buy-sell agreement, it is very important for each partner or shareholder to seek legal counsel so as to ensure that all their unique issues are addressed in the contract. Coming to an agreement on certain key business issues and reflecting them in the contract can at times be difficult requiring the presence of a legal mind. An attorney would be in a better position to understand all the requirements and be able to navigate all the complex issues to create an agreement that will satisfy all the parties involved.
A buy-sell agreement is a very important future planning tool. It is nowadays used for estate planning. This applies in the case of a deceased partner who leaves behind a widow, widower or heirs. Such an agreement facilitates the transfer of illiquid assets in the form of cash in case the heir doesn’t join the partnership. However, using it as an estate planning tool involves complex procedures that require tax auditors, insurance, and valuation experts and this is best coordinated by an experienced lawyer for it to be successful and less time-consuming.
Buy-sell agreements give heirs options.
Shareholder agreements have the benefit of creating choice for an heir in the case of a deceased partner. The heir has an option of joining the partnership as a shareholder or liquidating the equity if they lack the necessary experience or knowledge to run the business. The agreement allows for one to take direct ownership of stock, estate, insurance policies and other membership interests transferred to them.
Although one can enter into a shareholder agreement at any time in a business relationship, the most suitable time to draft and enter into one is at the start of a business relationship because the future is very unpredictable. This helps to avoid misunderstanding and court cases resulting from the lack of an agreement when a partner leaves or joins the business.
For a shareholder agreement to be fair and effective, it has to satisfy all the legal requirements set by the law. An attorney with acquisitions and corporate transaction experience will go a long way in helping one to ensure that the agreement is legally binding to all parties and that it complies with the laws and regulations that will be used during its application. A lawyer will help in drafting buy-sell agreements, purchase or sale agreements during a sale or purchase of equity, they will help in avoiding tax pitfalls and giving you a variety of funding options. with all this in mind, Yes, you do need a buy-sell agreement for your business.
Let the professionals at The Law Offices of Bj Richardson help you find the professional attorney to help you with your specific needs. We don’t handle every aspect of tax law, however, we can direct you to a professional that can handle any area of tax law that we don’t handle.
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