If you own a closely held business, the owners/partners will greatly benefit from entering into what is typically called a “Buy-Sell Agreement.” The basic idea is to ensure that ownership shares/units are not sold to third parties without the agreement of the owners. Likewise, the agreement ensures that the shares/units of any departing owner are either sold to the remaining owners or are only sold to a buyer that is acceptable to the other owners.

For example, take a situation where one of four owners dies unexpectedly. According to the deceased owner’s Last Will and Testament, the spouse inherits everything. Well, now the three other still-living owners of the company have the spouse of the decedent on the Board of Directors or Management Committee. That might be very unfortunate for the company’s continuing success. Aside from circumstances involving death, buy-sell agreements also attempt to handle ownership problems associated with incapacity, disability, retirement, individual bankruptcy/lender receivership of an owner, and divorce. There are three common types of buy-sell agreements. These are:

• Owners only — essentially, the ownership units of departing/withdrawing owners must be sold to other owners
• Company purchase — ownership units must be bought by the company — useful option if the ownership interests are balanced; selling to the company will not typically upset that balance for control purposes
• Third party allowed by agreement — sale of ownership units allowed but only if agreed by the remaining owners; can require unanimous consent

Of course, there are other options that might involve splitting control from the right to income. Thus, it might be agreed that a spouse might inherit, but only as a non-voting, incoming-receiving owner.

Aside from these issues, a good buy-sell agreement will have a number of other key provisions. These include:

• Clearly defined “trigger” events — death, disability, divorce, bankruptcy, lender receivership, retirement, etc.
• Limits on encumbering ownership units
• Can there be a forced buyout or a force-out? — suppose an owner wants out; can that owner demand to be bought out?; alternatively, can the other owners force out an owner?
• Price or calculation method — the price can be stated or set out in a defined formula; if the price is to be calculated by an expert, the method should be defined; slightly different calculations might be agreed upon for different triggering events; maybe slightly less for a voluntary withdrawal, etc.
• Dispute resolution for valuation — often, the method used is the “average of [some number of] expert valuation opinions” — consider including an arbitration requirement (arbitration being less costly and avoiding litigation)
• How to fund — life and disability insurance is often used but does not cover some circumstances like divorce, bankruptcy, forced buy-out, or a force-out
• Alternative payment methods — lump sum is desired, but that is not always possible; installment payments are an alternative; details should be agreed to, including the number of payments, interest, etc.
• “Binding on heirs” provisions — the agreement must be binding on an owner’s Estate and heirs; without this, the purpose of the agreement might be defeated
• Specific performance provision — a provision providing the remedy of specific performance is required in case there is a court challenge to the agreement

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