Do you need to review your company’s buy sell agreement to protect you and fellow owners in the case of a divorce, emergency, bankruptcy, incapacitation or death or one of your owners, shareholders or members? What are some of the triggering events which should be included in your buy sell agreement and what are some of the important issues which should be addressed?
Why is the Buy Sell Agreement Such an Important Portion of Your Corporate Documents?
The buy sell agreement protects all owners of a company while ensuring the preservation of the company itself in the event of a serious legal or catastrophic health event for one or more of it’s owners. This is why it is so important to review your company’s buy sell agreement on a regular basis. Your buy sell agreement should specify what happens if a “triggering event” occurs and the process for managing the transition of an owner’s stake or position within the company and associated decision making
Triggering Events in an Effective Buy Sell Agreement
The central triggering events which are covered in an effective buy sell agreement include the death of an owner, incapacitation as a result of an accident or health emergency, or valuation in the event of a legal issue such as a divorce or bankruptcy for an owner, shareholder, member or investor. This important agreement should provide specific details on how ownership interests or shares will be transferred or bought out in the event of a triggering event as well as how the value of the shares or ownership interest will be established. A “cross-purchase” agreement might establish the right and process of remaining owners to buy out the affected party’s interest in the company. Specific provisions such as a right of first refusal or the right to approve any associated sale are often sound strategies.
Important Issues to Address in Your Company’s Buy Sell Agreement
The most important issues to address during the creation or review of your company’s buy sell agreement are the process to determine the value of the shares or ownership interests at stake, as well as refunding or cross-purchase requirements after a trigger event. It is also important to consider what will happen if one or more of the remaining owners are unable to contribute required funding.
Valuation may be established by any of several available strategies which should be tailored to your unique company and situation. This can include but is not limited to “fair market value,” appraisal, book value or calculations based upon a number of factors. It may also be valuable to establish an annual valuation of the company and require ownership to sign the annual valuation certificate which would be a tool in the process of valuation during a triggering event.
Do you need to review your company’s buy sell agreement and other important corporate documents? We invite you to review the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
