Buy-Sell Agreements for Shareholders

A Buy-Sell Agreement provides for the buying and selling of the stock in a corporation (usually a small closely held corporation) of a withdrawing shareholder. This agreement benefits both the corporation and its owners. Here are the basics.

A Buy-Sell Agreement provides for the buying and selling of the stock in a corporation (usually a small closely held corporation) of a withdrawing shareholder. This agreement benefits both the corporation and its owners. (Sometimes a Buy-Sell Agreement includes a Right of First Refusal Agreement.)

Reasons for Withdrawing

A shareholder may either want to (or need to) withdraw from the corporation for a number of reasons, including:

• Wanting to sell (needs the money)
• Death
• Disability (mental or physical)
• Expulsion from the business
• Termination of employment
• Bankruptcy
• Retirement
• Voluntary or involuntary dissolution of the corporation

Setting the Price

Setting the price of the interest to be bought and sold is both the most important and difficult part of the Buy-Sell Agreement. Valuing a closely held business is fraught with potential difficulties, but it is a critical part of the agreement. There are different valuation methods from which to choose, including capitalized earnings formula, book value, appraisal, agreed price, or arbitration, among others.

Key Provisions

Key provisions of the Buy-Sell Agreement include:

• Restrictions on transfer of shares
• Permitted transfers
• Mandatory repurchase in certain cases
• Optional repurchase by the company or the other shareholders
• Obligations of transferees
• Possible purchase on death, total disability (physical or mental), or termination of employment
• Valuation (price and terms of sale)
• Dissolution of corporation
• Termination of agreement
• Spouses' (partners') consent

Hire a Lawyer to Draft the Agreement

You should not attempt to draft a Buy-Bell Agreement by yourself. Hire a lawyer for this!! This agreement can be extremely complicated and is very important for maintaining the continuity of your company. Check out How Do I Find a Corporate Attorney? for helpful advice.

For more information on this topic, be sure to read Why You Need a Buy-Sell Agreement.

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