Buy-Sell agreements are often recommended to corporations that involve more than one shareholder. This type of agreement is often put in place in the event of a shareholder’s death, retirement, disability or other specific circumstances within individuals.
The buy-sell agreement allows a smooth transfer of the corporate assets, the value of the corporation, terms of sale, and helps to minimize any potential disputes about the purchase and sale.
Here are a few key points to consider in the following triggering events:
Death of a shareholder
- The deceased beneficiaries may not want to be actively involved in the business.
- The deceased beneficiaries are entitled to the fair market value of the shares that the deceased held.
- The surviving shareholders may not want the deceased beneficiaries actively involved in the business.
- Deceased shareholders taxes and expenses might arise due to the sale of the business.
- If the deceased was a key person in the business, additional capital may be required to train or hire a replacement.
Disability or critical illness of shareholder
- Other shareholders might want to purchase the disabled shareholder’s interest as he/she is no longer able to contribute to the business.
- The disabled shareholder might want to exit the business by accepting the full market value of his/her shares.
- If the disabled shareholder was a key person in the business, additional capital may be required to train or hire a replacement.
Retirement/disputes of shareholders
- There should be provisions put in place in the event succession contemplation occurs between the shareholders and/or family members.
- Approvals from all shareholders must be clearly stated in the terms of transactions.
With a buy-sell agreement set in place, shareholders can rest assured that the corporation, employees and customers will have a smooth continuity of the business.