What is a shareholder buy-sell agreement?

A shareholder buys and sells agreement is a legally binding contract that stipulates how a shareholder’s stock in a business may be reassigned if that shareholder dies or otherwise leaves the business. The buy and sell agreement stipulates that the available shares must be sold to the remaining shareholder(s) and how the price will be calculated.  Buy and sell agreements are designed to ensure succession upon certain triggering events, such as death, divorce, bankruptcy, disability, or the sale of interests by one or more shareholders.  

 

 Shareholder Buy-Sell Agreement Disputes  

Buy-Sell Agreements are effective at providing a set of rules and procedures for resolving shareholder or partner disputes, providing liquidity to the heirs of a deceased partner, and protecting the business from a shareholder’s creditors. 

 When transitions of ownership occur within a company, disputes can arise if there is no agreement in place to facilitate a transaction involving an owner’s shares. To avoid a dispute be sure that your buy-sell agreement includes a valuation mechanism for determining a fair price for an owner’s shares.  The valuation mechanisms most commonly found in buy-sell agreements include Fixed-Price, Formula Pricing, and Business Valuation Process. 

In a fixed price agreement, the owners of a company set a specific dollar amount per share to be paid for an owner’s interest.  In formula pricing, a predetermined business valuation formula is used in the buy-sell agreement to calculate the value of an ownership interest.  With the business valuation process an outline is used for selecting a third-party valuation professional to appraise the company.

 If you have a buy-sell agreement in place, you and other shareholders should periodically review it to ensure it meets your objectives and reflects ongoing changes within your company. If you are concerned about certain aspects of your agreement, such as an outdated formula or fixed-price mechanism, consult with your attorney or financial professional.  A valuation professional may be helpful for, you and your attorney to implement a valuation mechanism that will reduce unexpected issues and provide peace of mind to you and your fellow shareholders.

 

Do not hesitate to contact the attorneys at Tishkoff if you have questions regarding business law or litigation. The attorneys at the Tishkoff, located in downtown Ann Arbor, Michigan, may be reached by phone or email.