What is the Buy-Sell Agreement Between Business Partners?


The sudden death of a shareholder in a private company can be a significant loss to the company's ongoing business. This would leave a gap in the management team and could lead to serious difficulties in the decisions made by the surviving partners and the new partner. The death of a major shareholder can also cause enough concern in the bank's business to freeze credit lines or, in the extreme, to call on ongoing loans.

In marriage situations, it is typical that a spouse leaves the entire estate to the other and vice versa. If no other arrangement has been made, the spouse of the deceased becomes the new shareholder. Is the spouse competent to have a say in the management of the company? Does the spouse want to continue to own a part of the business? Does the surviving partner (s) like the spouse? There is a simple way to avoid the confusion and possible conflicts that may arise in such a situation. It is the agreement of purchase / sale. There are a number of "trigger events" in which the agreement can come into effect. Death, retirement and disability are most often cited and any or all of them can be addressed in the agreement.

Consider a simple example of an incorporated business (although it may not be) which is now valued at $ 1,000,000 by the company's accountant, which has three partners, each with one-third (1 / 3). The value of the company has increased at an average rate of 7% per annum. If this rate of increase continues, the value of the company will be about $ 2,000,000 in ten years. With this information, the partners turn to the company lawyer to create a document that, once signed by each partner, will force the deceased's estate to offer its shares to the surviving partners in proportion to their current assets. Notice the word "offer". This formulation creates a choice for surviving partners. In fact, they may decide that the heirs of the estate would be a welcome addition to the partnership. However, this is not typical. For surviving partners, they may be required to buy or may simply be offered the right of first refusal. An evaluation formula is written into the agreement, so that whenever a death occurs, there is no argument regarding the assessment. As can be imagined, many clauses could be included in a purchase / sale and variations in the proportion of shares offered to each partner. Do not forget that there are a number of ways to structure a buy / sell and that the lawyer and the accountant must both be involved. Knowing the personal and financial situation of each partner will help them to structure a document that will work best from a personal point of view. estate planning and fiscal perspective. Once a purchase / sale contract has been signed by all shareholders, the next step is to fund the purchase / sale agreement.

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