Change is constant, in business as well as life. When you run a business, however, any change in each shareholder’s circumstances can have a detrimental impact on the company and even threaten its survival.
This is where a buy-sell agreement can make a critical difference in the future of your business. When properly drafted and executed, it protects a company from potentially negative choices or actions of the owners. In this blog, we’ll review the ways that your buy-sell agreement can ensure the integrity of the enterprise during a shareholder’s personal challenges or after their departure.
Understanding Buy-Sell Agreements
Buy and sell agreements are commonly used by different business entities to facilitate changes in ownership. There are two primary types:
- Cross-purchase agreements: The other shareholders buy the shares that are available for sale.
- Redemption agreements: The business entity purchases the shares.
Some agreements combine elements from both, with individual owners buying some shares and the remainder acquired by the business. To fund these acquisitions, shareholders often buy life insurance policies on each other, so that if one dies, there are resources available to purchase their shares from their estate.
A buy-sell agreement can also indicate share valuation methods, so if a dispute arises about the value of the company or a departing owner’s share, the method included in the agreement would be used to settle the dispute.
Areas Covered By Buy-Sell Agreements
Below is an overview of some triggering events that a buy-sell agreement can help smooth over and mitigate any impact on the company.
- Shareholder Disputes: If a dispute arises between two shareholders and it cannot be resolved, a buy-sell agreement can enable one of them to buy out the other’s shares, ending the relationship but not the business.
- Divorce: If one of the shareholders gets divorced, there is always the risk that the court will award some or all of their shares to their former spouse. A buy-sell agreement can assist you in fairly and legally removing an unwanted shareholder.
- Death or Disability: Should a shareholder die, a buy-sell agreement can enable the business to buy their shares from their estate. The process works similarly if a shareholder becomes incapacitated: you and the other owners can buy back their shares and protect the business from an unwanted shareholder whose inexperience can damage its future.
- Bankruptcy: If a shareholder files for bankruptcy, a buy-sell agreement can allow the shareholders to purchase the shares and protect the company from creditor claims or collection actions.
- Outside Investors: A buy-sell agreement can prevent shareholders from selling their shares to outside investors without approval from the remaining shareholders. Like a divorce contingency plan, this arrangement prevents the company from being impacted by an inexperienced or incompatible new owner.
Contact a Business Law Firm in Alaska
At Barlow Anderson, our experienced business law team can help you develop a buy-sell agreement that addresses any contingencies that could affect the future of your company. For more information or to schedule a no-obligation consultation with an attorney, contact us online or call (907) 375-0750.
