- Triggering Events
The first thing that needs to be established in a buy-sell agreement is the triggering events that will activate the agreement. These events can include the death, disability, retirement, resignation, termination, or bankruptcy of one of the owners. The agreement should also specify the circumstances under which a shareholder can voluntarily sell their shares.
- Valuation Method
The next crucial element is the valuation method for the shares. The agreement should specify how the business's value will be determined when a shareholder wants to sell their shares or is forced to do so. The valuation method can be based on a fixed price, appraised value, or a formula that takes into account the business's financial performance.
- Funding Mechanism
A buy-sell agreement also needs to include a funding mechanism for the purchase of the shares. The agreement should specify how the buyer will pay for the shares, whether it will be through cash, a promissory note, or by using insurance proceeds. If insurance is used, the agreement should specify the type of insurance and the coverage amount.
- Restrictions on Transfer
The buy-sell agreement should also include restrictions on the transfer of shares. These restrictions can prevent the sale of shares to third parties who are not involved in the business. The agreement can also include a right of first refusal, which gives the other shareholders the first option to purchase the shares before they can be sold to anyone else.
- Dispute Resolution
Dispute resolution mechanisms should be included in the buy-sell agreement to help resolve conflicts that may arise. The agreement can include provisions for mediation, arbitration, or litigation to resolve disputes. The parties should also agree on the jurisdiction where any disputes will be heard.
- Termination
Finally, the buy-sell agreement should specify the circumstances under which the agreement can be terminated. For example, the agreement may be terminated if all the shareholders agree to dissolve the business or if the business is sold to a third party.
A buy-sell agreement is a critical legal document that every business with multiple shareholders should have. It protects the interests of all parties involved and helps to avoid conflicts that may arise. The elements discussed above are just some of the key provisions that should be included in a comprehensive buy-sell agreement. It is advisable to seek the advice of a qualified attorney to draft or review the agreement to ensure that it meets your specific needs and protects your interests.
For a complimentary review of your buy/sell agreement contact me, (909) 307-4945 or bradly_stevens@pacificadvisors.com.