The Importance of Buy-Sell Agreements for Closely-Held Businesses






12When people first open their own business, they envision that it will be successful and meet the needs of their customers, clients, themselves and their families.  If the company truly thrives, the founder(s) may want to expand ownership in their business to people that they trust or maybe even family members.  If so, the owners need to enter into a buy-sell (or shareholder) agreement which restricts the ability of an owner to transfer their ownership interest to someone not affiliated with the business (i.e., third parties).  Those third parties could be anyone, including divorcing spouses or creditors, which could lead to problems for the business down the road, especially if the new owners want to take the business in a different direction or even liquidate the business to satisfy their own needs.

Having an agreement that restricts ownership in the company to those trusted by the original founders maintains certainty in control of the operation and overall vision of the business.  Further, the buy-sell agreement determines when the company or other owners can buy-out another shareholder’s stock, including instances of divorce, death, disability, bankruptcy and the like.  And, it can lay-out the method of valuing a departing shareholder’s interest in the business (fair market value, book value, EBITDA, etc.) and how the shares will be paid for (lump-sum, installment payments, etc.).  So, my firm’s belief is that every closely-held business needs to have a buy-sell agreement to help ensure future viability of the enterprise.

That being said, the words being used to define the terms of the agreement are very important as the following article regarding the definition of “transfer” shows.  I have extensive experience in drafting shareholder agreements to meet the owner(s)’ needs, whether the owner wants to keep control to a small group of individuals or potentially pass the business down to his children and future descendants.  And, I tailor my agreements to each client’s situations so that the definitions of the words used in the agreements actually mean what the client intended.  So, when your business is ready to take the next step, please contact my office to schedule an appointment to discuss your needs and options going forward when preparing a buy-sell agreement.