Now let’s get down into the meat of what’s in a buy-sell agreement. The provisions in a buy-sell agreement will vary depending on individual needs. This is intended to give an overview of typical types of provisions.
Here’s an overview of three types of provisions common in buy-sell agreements: right of first refusal, triggering events, and forced sale. A right of first refusal can be a broad provision requiring the seller to offer to sell their interest, or a portion of their interest, to the company and/or owners before selling to an outside party. There can also be triggering events in which the company and/or other owners have an option to buy the interest or its mandatory to buy the interest. Typical triggering events include death, disability, divorce, retirement, voluntarily or involuntary termination of employment. These agreements are flexible, so you may think of other cases which you’d like to include as a triggering event. Lastly, forced sale provisions force a buy-out of the company. If one owner offers to buy the other owner out, the owner who was offered the sale can either accept the offer or turn around and buy the other owner’s interest at the same price and with the same terms and conditions as the original offer. This allows dueling owners to ensure that they are not trapped into business together unless they can find an outside buyer.
Each of these options come with additional questions such as how a purchase of interest would be funded (insurance, unsecured promissory note, etc.), how long should the company and/or owners have to decide whether they’ll buy the interest, and how the purchase price will be determined (listed in agreement and updated each year, appraisal, book value, etc.).
To get started on your buy-sell agreement or to review one that you currently have, contact one of our business attorneys in our Sioux City, Sioux Falls, or Omaha locations.