A buy-sell agreement refers to a contract that outlines what happens to various owner’s interests in the event that the ownership structure is altered. More often than not, these documents are put into place to handle a variety of “triggering events” that are common in business ownership such as death, disability, or another event related to the departure of an owner.
Even if a business is closely held in Texas, it’s wise to both anticipate and plan for these events because they can happen at any time. When it comes to enforceability, separate buy-sell agreements have advantages over similar terms that might also be referenced in bylaws or other agreements for the business.
What’s a Triggering Event?
These days, it’s better to be specific and yet broad at the same time by considering the whole range of events that could impact a company. Some of the most common trigger events include:
- Voluntary transfers
- Involuntary transfers
- Employment Termination
- Loss of a professional license
- Violations of finance covenants
Think About Share Transfer
The majority of buy-sell agreements will include verbiage prohibiting the transfer of shares without prior approval from the company or other owners. In some situations, it’s a good idea to allow “permitted transfers” that provide for the transfer of shares in specific circumstances. Usually even allowing permitted transfers is only wise when there are restrictions in place such as tag-along rights, rights of first-refusal, or drag-along rights for the company or other owners.
How Will The Purchase Price of the Company Be Decided?
It’s all well and good to outline the possible circumstances that determine a triggering event when ownership is restructured, but it’s a big mistake to stop there. A solid buy-sell will include details about how the purchase price of the company will be included. Skip this section and you are likely to have owners arguing down the line, holding up a sale or transfer going forward and stalling business operations.
There are numerous methods that might be used to determine purchase price such as: independent appraisals, calculations based on revenues or earnings, or annually agreed on values. Some owners shy away from the appraisal option because it can be expensive to accomplish them, but they are also the most objective way to have the valuation completed because they involve an outside party looking in.
Determining the purchase price can be one of the most complex parts of putting toget her a buy-sell because the ramifications for owners in the future can be tremendous. Questions to consider include:
- Will installment payments be approved/allowed?
- What triggering events spur a valuation?
- Do surviving owners want a spouse or other transferee to step in as an owner?
- How will the agreement be funded by any owners who have purchase obligations?
- Will the financial obligations involved in carrying out the terms of the agreement harm the company?
- Does the valuation method give any particular person an unfair windfall?
Drafting a buy-sell agreement is a process that should include a consultation with a Texas business planning attorney to ensure that the document is aligned with your needs and concerns.