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ESTATE PLANNING FOR BUSINESS OWNERS – Importance of Buy-Sell Agreements

 

If your closely held corporation has multiple stockholders, you should have a Buy-Sell Agreement.

A Buy-Sell Agreement, also known as a Stockholder Agreement, or Restrictive Stock Transfer Agreement, is an agreement between the shareholders that governs the management and control of a business upon a shareholder’s death, incapacity, bankruptcy, termination of employment or other significant event.

For instance, the death of a shareholder of a closely held corporation creates a number of issues. The deceased shareholder’s beneficiaries often may have no interest in participating in the business.  If they wish to sell the stock, they will likely have trouble finding buyers and may be forced into a “fire sale” because of estate liquidity needs. In either of these cases, the remaining shareholders may be saddled with a new partner they do not want – either the deceased shareholder’s beneficiaries or the buyer of the decedent’s shares.  Of course, these problems can be avoided if the decedent’s beneficiaries simply sell to the remaining shareholders, but then the parties may differ wildly on the value of the shares.

The Buy-Sell Agreement is the planning tool most frequently used to address these issues by: (i) restricting the transferability of stock outside of the original partners; (ii) providing deceased shareholder’s beneficiaries with a ready market for the stock; (iii) negotiating a fair stock price (or method for later determining a fair price) while the partners are in agreement and neither has unfair bargaining power as a result of unexpected circumstances; and (iv) orderly succession and business continuity.

The best time to enter into a Buy-Sell Agreement is now – before a triggering event takes place and while the shareholders are generally in agreement.  If you do not have a Buy-Sell Agreement, we would be happy to discuss this with you further. In addition, if you have an old agreement, review may be warranted to ensure that it reflects the shareholders’ current circumstances and an appropriate purchase price.