A buy-sell agreement is a contract between business owners that outlines the terms for the potential sale of an owner’s shares. Of course, no one ever starts a business thinking they’ll sell their shares. In fact, most business owners forgo the creation of a buy-sell agreement. But having a buy-sell agreement is all about being prepared for the unexpected. What if something completely unexpected happens? The death of owner, disability, retirement to care for a loved one, divorce, or perhaps an owner needs to exit the business for other reasons. This article will focus on these “triggering events” and their impact on a business.

The triggering events in a buy-sell agreement require the mandatory buyout of an owner’s stake.

Common triggers include:

  • Death of an owner – In this case, the shares will then pass to the spouse or family. But is that what the other owners want? Is that really what the surviving spouse wants? Taking time to add details here ensures heirs don’t gain ownership without the remaining partners’ approval.
  • Disability or long-term illness – If an owner can no longer work due to health reasons, their shares may need to be sold back to the company. This prevents the owner’s prolonged absence from negatively impacting operations. This ultimately serves to protect the value of the company that all the owners have built.
  • Retirement – Many agreements mandate retirement at a certain age, ultimately reaching this age would trigger a buyout. This allows partners to plan for eventual leadership transitions and have a way of exiting the company without much discussion.
  • Divorce – Dividing business assets is typically in a divorce proceeding. How should a price be terminated for the business in this scenario? Does the owner get to keep his shares or is he required to sell to his co-owners?
  • Owner disagreement – Some agreements allow majority owners to force the sale of shares if a partner becomes disruptive. This protects the business from internal disputes.
  • Failure to meet obligations – An owner who neglects duties or financial commitments may have their shares involuntarily bought out.

As you can see, these events can significantly impact the company’s ownership structure, leadership and overall value if not addressed. The buy-sell agreement provides clear procedures to facilitate a smooth transition. Without it, triggering events could cause messy dissolutions, family inheriting shares, and drawn-out litigation.

Buy-sell agreements empower business partners to plan for worst-case scenarios. Carefully considered triggering events and buyout terms prevent uncertainty and conflict should a partner depart for any reason. This allows the business to move forward with minimal disruption. Owners should always work closely with legal counsel to develop agreements that are specific and thorough to protect both the individuals and their company’s future.