In the previous issue of the Exit Planning Navigator®, we discussed what a buy-sell agreement is and why you should dust it off, take a second look at it, and call your advisors to update it.
If you just aren't convinced that setting up that meeting is all that important, in this issue, we'll look at the events that can (and do) crop up in the life of a business and that can be handled by a carefully designed, frequently updated buy-sell agreement. Once you see how one agreement can impartially and fairly treat all parties when bad things happen, we think you'll make that call.
Buy-sell agreements can be designed to handle the unhappiness that can arise when any of the following events happen to the shareholders of a closely held company:
- Death of a shareholder
- Disability of a shareholder
- Divorce of a shareholder
- Bankruptcy of a shareholder
- Sale of part or all of the company to a third party
- Retirement of a shareholder
- Involuntary termination of a shareholder
- Business dispute among shareholders
You probably have no trouble imagining how most of these events (the death or disability of a shareholder, for example) could cripple your company or your family if left unaddressed. But some events, like the involuntary termination of a shareholder, are harder to grasp. Rarely do owners anticipate that one day they might have to terminate the services of another shareholder. If they can imagine that scenario, it is rarer still that they can imagine the thorny problems that will arise. Is the terminated shareholder required to sell back his stock? Is the remaining shareholder or the company required to purchase it? In a divorce scenario (especially in a community property state) do you run the risk of ending up with your co-owner's ex-spouse as a new co-owner?
Let's look at a few all-too-common problems that a well-written buy-sell agreement can solve.
Sale of Part or All of Company to a Third Party
You receive a call from a legitimate representative of a deep-pocketed Private Equity Group who has identified your company as an acquisition candidate. He makes an initial offer that would guarantee your family's financial security for life. Imagine your surprise as your 25 percent co-owner responds to your announcement, "Thanks, but no thanks. I'm just getting started and think we can take this company to the next level ourselves!" You call the PEG back to offer your stock for sale, but the PEG (like almost every third party owner) isn't interested in buying a part of your company. It is an all or nothing offer. Since your buy-sell agreement doesn't address this issue, you hang up and return to work.
A well-crafted buy-sell agreement can stipulate that when a third party makes an offer to buy a company's stock, the other shareholders must match that offer or must sell their shares to that third party.