Jun 01, 2022

Understanding Your Buy-Sell Agreement – Part 3

Written by Dalton Hopper, CVA, CFE

As mentioned in our previous articles in this series, we discussed what should be outlined in the buy-sell agreement as well as how the business should be valued. Now, let’s discuss the events that can trigger a valuation under a buy-sell agreement.

Typically, triggering events occur when an owner-employee leaves the business, through resignation, termination, retirement, becomes disabled or passes away, becomes divorced, or declares bankruptcy.

  • For example, if an owner-employee resigns, he/she has the potential to create significant operational issues within the business. Buy-sell agreements can mitigate this risk by specifying that the stock or interest be sold given the circumstances.
  • Another issue that can arise is if an owner retires. Will the company be required to purchase his/her ownership interest? How will the purchase be funded? Will it be through a cash purchase, a loan paid over time, or held until death with the life insurance proceeds obligated to pay the deceased owner’s estate?
  • In the case of an owner’s divorce, the issue becomes the owner’s ex-spouse being entitled to an interest in the business. Not only may the ex-spouse have no experience in operating the business, but there would likely be relational tensions. In this instance, the buy-sell agreement may treat any transfer of stock or interest as an offer to sell and could trigger a right of first refusal provision.

By having a discussion around the possible scenarios and understanding that each owner of the business can potentially be a buyer or seller, business owners can develop a plan for  triggering events that should be included within the business’ buy-sell agreement.

Understanding Your Buy-Sell Agreement – Part 1

Understanding Your Buy-Sell Agreement – Part 2

The information provided in this series does not, and is not intended to, constitute legal advice; instead, all information and content in this series are for general informational and business purposes only. Please contact your attorney to obtain advice with respect to any particular legal matter, including a comprehensive discussion of other provisions that might be advisable in a buy-sell agreement.