Most closely held businesses with multiple owners should have a Buy-Sell Agreement, often called a Shareholder Agreement. Without such an agreement problems can arise. Upon an owner’s death his or her shares in the company will often pass to a surviving spouse. This may or may not be desirable from the surviving business owner’s point of view.
Another situation that can arise is that one shareholder will cease to be active in the business. If his/her shares are not reacquired at that time, you may have to buyout the departed shareholder’s shares years later; and for a greatly inflated price. Not that this is unfair, but most people feel that only the people who actually contribute to the business’ success should reap the benefits.
The Buy-Sell Agreement can address these and many other issues between business owners. The agreement should address some or all of the following:
- Describe what happens with an owner’s shares upon death, divorce, incapacity, retirement or other termination of a shareholder’s service to the Company;
- Lay out dispute resolution provisions;
- Describe a valuation mechanism for the Company’s shares;
- Require a commitment to the Company of the shareholders;
- Set out extraordinary actions requiring unanimous consent; and
- Set restrictions on the transfer of shares of the Company.
A thorough Buy-Sell Agreement can alleviate a lot of headaches down the road, especially if the Company is successful. I tend to recommend such an agreement to all of my closely held business clients with multiple owners.