Question

In insurance

Please, Discuss the value of a buy-sell agreement to a business owner,

and how it functions at a triggering event.

Answer 1

A buy-sell agreement is a common contract between shareholders that both restricts ownership and facilitates the transfer of shares in a closely-held company. The other shareholders or the company become the buyers (marketplace) for what would otherwise be highly illiquid stock.

A buy sell agreement, also known as a buyout agreement, is a contract that provides for the sale of an owner’s share of a business. The sale may be triggered for several reasons, such as the owner’s retirement, bankruptcy, unresolvable conflict with another owner, death, or disability. The buyer may be another owner, employee, or third party.

The main reason to draft a buy sell agreement is that “hope” is not a good business strategy. If you don’t have a buy sell agreement, a number of bad things are quite certain to happen at some point in your business’ life:

• The business could wind up in the wrong hands, like the angry spouse of a former owner.
• Your business could die in the courts while surviving owners or heirs are contesting their rights and entitlements.
• Without specifying a ready buyer for your business in advance, you or your heirs may not receive fair compensation when you exit.
• If you or your heirs are forced to find a buyer for the business on short notice, expect the sale price to be far below fair market value.

A buy-sell agreement should be tailored so that a buy-sell is triggered if a company owner dies, becomes disabled, retires, gets divorced, becomes insolvent, has a falling out with the other shareholders or disassociates with the company for any reason. You, your partners and your attorney decide what triggers are appropriate and how shares will be valued and bought out in each case.

Triggering events may include the following:

1. Death-When an owner passes away, his or her share in the business passes to their spouse, children, or other heirs.

2. Disability-If a business partner becomes disabled and can no longer work, the buy sell agreement can give other owners the right to buy out the disabled partner.

3. Divorce-If a business owner gets divorced, a court may order that any assets, including his or her portion of the business, must be shared with the ex-spouse.

4.Bankruptcy-If a business owner becomes insolvent, it’s in the company’s interest for the other owners to buy out the bankrupt owner’s share

5. Retirement-In case an owner decides to retire, a buy sell agreement may provide that the remaining owners can purchase his or her share by paying fair compensation.

6. Conflict among co-owners-Unfortunately, one of the primary reasons that business owners exercise a buy out option is unresolvable conflict with a co-owner.

7. An owner threatens the business’ integrity-Sometimes, things escalate from conflict to something that’s more dangerous to the business’ future.

8. Voluntary “cash out”-Sometimes, an owner may want to leave the business voluntarily to pursue other opportunities or may want to sell a portion of his or her current ownership.