Events the agreement should anticipate
A buy-sell agreement sets out what happens to an owner's interest when certain events occur, commonly death, disability, retirement, or divorce. Some events give the company or the other owners a right to buy; others create an obligation on both sides. The agreement should also say whether a departing owner must sell, so that shares do not end up with a surviving spouse, an ex-spouse, or a creditor who has no role in the business. Without one, those events are handled under general law and whatever the governing documents happen to say, which rarely matches what the owners would have chosen.
Price and funding
The valuation method is usually the hardest part. A fixed price agreed once and not updated often becomes unfair; a formula can drift away from real value as the business changes; an appraisal process is more accurate but slower and open to dispute. Owners should decide how often the price is revisited and what happens if it has not been. Funding is the other half: life insurance often pays for buyouts on death, while installment payments are common for retirement or departure. A buy-sell agreement that sets a price the company cannot afford to pay creates a second problem rather than solving the first.
Building or revisiting the agreement
We work with owners and their accountants on the valuation method, the tax effects of a purchase by the company compared with a purchase by the other owners, and how any insurance is owned and paid for; recent court decisions have made that structural choice more consequential for estate tax. If an agreement already exists, we review whether its price mechanism and funding still make sense, since many were signed at formation and left untouched. Bring the current operating or shareholder agreement, any existing buy-sell terms, insurance policies, and recent financial statements. If an owner's departure is already underway, the agreement's notice and timing provisions may already be running.
