You want to protect your company against disruptive, harmful, and nonproductive owners, which may include divorced spouses, competitors, and disgruntled former employees. You also believe that your estate requires protection. The parties—your partners and yourself—enter into a buy-sell agreement with aligned, or at least not sufficiently misaligned, interests, making discussion of the business and valuation aspects of these agreements impossible.
You know that when a trigger event occurs, the interests of the parties — buyers and sellers — may diverge, and agreement over pricing and terms can become difficult or impossible to achieve.
The following list includes features you should examine when devising your own agreement:
- Agree prior to the occurrence of trigger events or other forms of dissension. In order to write, sign, and date the agreement ahead of these events, you must agree on potential future occurrences.
- Identify which future events need to be considered. Many things can happen to trigger the usefulness of a buy-sell agreement: owners may quit, be fired, retire, pass away, become divorced, or go bankrupt. Determine which future potential triggers you want to include in the buy-sell agreement. It’s important that all owners think seriously about these issues. If the buy-sell agreement operates satisfactorily, it will kick in when an applicable event occurs.
- Define the trigger events. Firings can happen with or without cause, so agreements must specify what happens in each circumstance. You and your partners should anticipate and document potential events in the agreement.
- Determine the price at which the identified triggers will occur. This is one of the hardest parts of establishing an effective buy-sell agreement. It’s also why many appraisers and other advisers recommend appraisal with a predetermined appraiser as a generally preferred pricing mechanism. The fixed prices in these buy-sell agreements pose a significant risk due to their infrequent updates.
- Establish the conditions for payment of the price. In this regard, important factors to consider include down payment, payment schedule, interest-rate schedule and fixed or floating interest rate.
Buy-sell agreements are based on different business situations and are formed by unique parties — you and your partners. For more on the components of buy-sell agreements and how they can work for your firm, give us a call today.