Many businesses in Florida have been created by two or more individuals who had a shared ambition to create and operate the same type of business.
When starting the business, these individuals usually try to attend to all the critical details, such as business structure, individual shares of the business, business name, business location, initial capital, tax status (“C” or “S” corporation or LLC), and similar matters.
One business issue that is rarely considered at the outset is the exit of one or more of the corporate founders. What happens if the owners of the business have an unresolvable conflict? Or what happens if a shareholder dies unexpectedly? Or suffers a disabling illness or injury?
A properly drafted buy-sell agreement that is accepted by all the shareholders can resolve all of these problems before they occur.
The basics of an effective buy-sell agreement
All buy-sell agreements have several clauses in common. The first clause names the parties to the agreement. The parties usually include all the shareholders and, in some cases, the business entity itself. The business entity must be a party if the agreement requires it to purchase the interest of the deceased or disabled shareholder.
The triggering events
The agreement must identify the events that set the buy-sell provisions in motion. These events are usually called “trigger events.” Common trigger events include the death of a shareholder, the disability of a shareholder, an irreconcilable difference between shareholders (usually expressed in a formal written notice to the other shareholders), the bankruptcy of a shareholder, and the divorce of a shareholder.
Including the divorce of a shareholder on the list of triggering events is a helpful precaution that can prevent a shareholder’s interest from being transferred to his (or her) spouse when assets are divided in the divorce.
The mechanics of the sale
The buy-sell agreement must specify a procedure for valuing the shares of the departing shareholder. Some agreements state a specific price, but this choice can cause problems if the value of the entity has either greatly increased or decreased after the agreement is signed. Alternative price-setting mechanisms include having the firm’s accountant value the company or using a panel of neutral arbitrators to set the price.
Financing the sale
Many buy-sell agreements use life insurance on the lives of the shareholders to provide cash to finance the sale of shares. The life insurance can be either term or whole life insurance, but the choice should be made after consultation with an experienced insurance agent. A loan from a third-party is another option.
A buy-sell agreement is a very important and complicated legal document. An experienced business lawyer should be retained to draft the agreement.