When two Kentucky entrepreneurs decide to join forces and create a business, they are usually filled with optimism and rarely do they give much thought to the problems their business may face as time passes. Business downturns probably receive as much or more attention than any other risk the business will endure.
But businesses are run by humans, and the business will be subject to the same risks that humans face: unexpected death or disability, interpersonal disagreement, a change in lifetime goals, and any number of other aspects of the human condition that might also affect the health of the business. One method of insulating the business from these risks is the preparation and execution of a buy-sell agreement at the time that the business is formed.
What is a buy-sell agreement?
A buy-sell is a contract between the owners of a business that specifies how and when the business can or must purchase the shares of one of the shareholders. Generally speaking, a shareholder must sell the entirety of his or her interest in the company when the person dies or becomes disabled to the extent that the person can no longer participate in the business. The buy-sell agreement will either specify a price for those shares or a method of determining the price.
A less obvious reason for executing a buy-sell agreement is to provide for the situation in which one or more shareholders wish to leave the company or where some of the shareholders desire to compel one or more shareholders to leave the company – a forced buy-out.
It is not possible in a short blog to summarize all of the terms of a buy-sell. Obviously, the terms and conditions of the buyout must be described in the agreement. If the agreement includes a mandatory buy-sell provision, the mechanics of providing notice, paying the sale price and endorsing the share of the departing shareholder must be described.
Using an attorney
The best method of preparing a buy-sell agreement that will serve the needs of the company and its shareholders is a consultation with an experienced business attorney early in the business formation process. A knowledgeable lawyer can advise the prospective shareholders about the terms that should be included in the agreement and the terms whose inclusion might be wise.