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Using a buy-sell agreement to protect an interest in a business

On Behalf of | Aug 31, 2022 | Estate Planning |

Many residents of Dayton work their entire lives to build a business that can be passed to their heirs. However, many unexpected events, such as a premature heart attack or disabling illness such as a stroke, can ruin these plans. Among the many estate planning tools available to protect a person’s interest in a small business is what is known as a “buy-sell agreement.”

The basics

The primary function of a buy-sell agreement is to provide for the orderly and predictable transfer of a corporate interest when a principal shareholder dies or becomes disabled by an accident or injury. A typical buy-sell agreement identifies the persons who are subject to its terms and then defines what is known as a “triggering event.” Triggering events usually include the death of a shareholder, the onset of a disability caused by an illness or accident, divorce, a criminal conviction, bankruptcy of a shareholder or other events that may be of concern to all shareholders.

The buy-sell agreement imposes on each party and their estates the dual obligations to sell their shares if they are the victim of a triggering event or to purchase the shares of any other shareholder who suffers a triggering event. The purchase obligation can be imposed on the business or on the surviving individual shareholders.

Determining the price of the shares

Some buy-sell agreements simply set an arbitrary share price agreed to by the parties to the agreement. If this price is not periodically adjusted to reflect changes in the fortunes of the business, the agreement can impose a severe and unfair financial hardship on either the selling shareholder or the purchasing shareholders. A safer method of setting a price for the shares being transferred is to incorporate a provision in the agreement requiring the parties to select an appraiser to value the business. Various mechanisms can be used to ensure a fair process for selecting the appraiser.

The mechanics of the sale

A well-drafted buy-sell agreement must specifically describe the mechanics of the sale and transfer of shares. The most common method of payment usually requires the purchasing shareholders or the corporation to deliver a certified check for the total price of the shares to the disabled shareholder or his estate if he does not survive.

Getting the proper legal counsel

Drafting a buy-sell agreement is a complex legal task. Anyone considering a buy-sell agreement should consult a knowledgeable estate planning attorney for assistance.

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