buy-sell agreements

Category: buy-sell agreements

Four Elements of a Sound Buy-Sell Agreement

From developing a fool-proof business plan to selecting the perfect partners, you spent a lot of time and energy in tuning your business ownership dreams into reality, but did you take measures to safeguard your company and your interests in it? Life happens, and unfortunately, much of what goes wrong in our lives is out of our control. Divorce, death, and fallouts are a very real possibility, and each can spell financial disaster if not planned for. Fortunately, though one cannot anticipate many life-changing events, they can prepare for them, with a buy-sell agreement. Buy-sell agreements detail what is to become of an owner’s interests in a company should they be forced to leave the company for whatever reason.

It is not enough to have a buy-sell agreement in place. Buy-sell agreements should leave as little room for negotiation or interpretation as possible. At Cloud Willis & Ellis, our business litigation lawyers have drafted numerous buy-sell agreements over the years, each one designed to account for all possible scenarios and risks. In order to do that effectively, we make sure that each agreement includes clauses regarding the following:

Triggering Events
Valuing an Owner’s Interests
Mandatory vs. Optional Purchase
Payment

Detail Triggering Events

First and foremost, a buy-sell agreement should explain what might be cause to enact a buy-sell agreement. Partners at most firms agree that events that may trigger an option or requirement to repurchase an owner’s interest include death, divorce, bankruptcy, disability, an adverse lawsuit judgement, retirement, termination of employment, and/or the attempted sale of one’s interest to a third party. Without such a clause, partners may have difficulty enforcing a buy-sell agreement when the partner in question is unwilling to sell his or her share in the company.

Valuing an Owner’s Interests

Perhaps one of the most debated issues among business partners is how the value of each owner’s interest should be determined. In an ideal world, everyone would have equal share, but the business world is not ideal—it is cutthroat. In order to guarantee that everyone’s interest is calculated fairly and in the same manner, there should be a clause in the buy-sell agreement that details the valuation method to be used. This clause should also answer the following questions:

Who will calculate the value upon the occurrence of a triggering event?
Will the person’s whose share is at stake have an option to appeal the board’s decision?
Will there be a right to a second opinion?

Arriving at a decision regarding valuation methods should not be done lightly, and should only be done after a collaborative discussion between board members, owners, attorneys, accountants, and a financial advisor.

Mandatory Vs. Optional Purchase

A sound buy-sell agreement outlines what triggering events call for a mandatory purchase and sale, and which create an option to purchase or right of first refusal. For instance, the death of an owner might trigger a mandatory purchase and sale, while an attempted sale to a third party might allow for a right of first refusal from the other partners.

How Payments Will be Made

This is not as straightforward as one might think, and most people assume that an agreed upon purchase price will be paid in cash—that is, until they are confronted with a triggering event themselves. In the event of a death, most firms agree that the purchase price should be paid via life insurance, which results in an all-cash payout within six to twelve months after the death. However, other triggering events may require a deposit and a payment plan, which will be fulfilled over an extended period of time. These events may be a sudden disability, retirement, or termination of employment. To prevent confusion when the time comes, a buy-sell agreement should contain a clause that details exactly how the purchase price will be paid upon each triggering event.

Retain the Help of a Birmingham Business Litigation Lawyer

A buy-sell agreement is only as effective as you make it. If you want to ensure that your agreement is foolproof, and that when it comes time to use it there is no room for negotiation or interpretation, hire a business litigation lawyer for help drafting it. Call Cloud Willis & Ellis to schedule a consultation today, or reach out to their firm online.

Buy-Sell Agreements in Alabama

If you are a co-owner of a business, or are considering starting a business with a partner in Alabama, developing a buy-sell agreement is a very important step to take. A buy-sell agreement (BSA) is an agreement between business partners outlining what will happen to an owner’s share in the business if they leave for some reason. Owners leave their businesses for a variety of different reasons including death, disability, retirement, or the desire to pursue a different career. Because these departures are sometimes sudden, it is very important to have a buy-sell agreement in place that dictates the terms and conditions under which the remaining owners will be allowed to purchase the leaving owner’s share of the business. Working out a buy-sell agreement when a business is first formed is a very prudent thing to do because this can help the parties involved negotiate rationally in anticipation of issues rather than emotionally after issues arise. Involving an impartial corporate law attorney who can draft the agreement and help estimate the value of the company is also a great idea. You can also achieve some of the same results within the company’s operating agreement.

Why Create a Buy-Sell Agreement?

According to USLegal.com buy-sell agreements are generally created for three different reasons:

To establish the business’ value for death tax purposes.
To avoid continuing the business with a deceased co-owner’s heirs.
To prevent partial ownership of the business from falling into an “outsider’s” hands.

In order to realize these various objectives, buy-sell agreements come in several different forms. For example, a buy-sell agreement can take any of the following shapes:

Stock Redemption Agreements or Stock Retirement Plans: These buy-out agreements are formed between the business and the individual owners.
Criss-Cross Agreements: A buy-sell agreement between the owners of the business.
Third Party Business Buy-Out Agreement: These buy-out agreements are formed between the business’ owners and another key person, such as a family member.
A Combination: A buy-out agreement can also be a combination of the forms listed above.

Mistakes Commonly Made When Drafting Buy-Sell Agreements

Although buy-sell agreements are very commonly developed by closely held business owners, according to the Cannon Financial Institute there are several mistakes that are commonly made when drafting these agreements. A few of these mistakes include:

Waiting Too Long to Draft the Agreement: It is important to draft your buy-sell agreement well before it is needed. In fact, it’s never too early for your business to develop a buy-sell plan. However, it is important to remember that a business’ needs change over time and that you may need to change provisions in the agreement at some later date.
Using a Fixed Valuation: Buy-sell agreements often contain a fixed dollar amount that operates as a purchase price in the event that a triggering event occurs. This fixed amount will probably need to be updated every couple years as the business grows, and can be problematic as many business never actually update their buy-sell agreement.
Inadequate Funding: New business are often low on cash, and therefore buy-sell agreements are often not funded appropriately. While life insurance policies are often used to fund buy-sell agreements, it is important to make sure that the insurance coverage is sufficient, even after the business has grown.

What Can We Do to Help?

Drafting a buy-sell agreement that meets the individual needs of your business is critical to the long-term health of your organization. Employing a law firm that has experience drafting corporate documents, such as Cloud Willis & Ellis, LLC, will help ease your mind and ensure that the future of your company is safely in order. Our corporate law attorneys are happy to assist you and can be reached at our office in Birmingham (205-322-6060) or in Mobile (251-545-4844).

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