Unexpected events can crop up in the life of every business. When unfortunate things happen, it's helpful to have a carefully designed and frequently updated buy-sell agreement in place that treats all parties fairly and impartially. Let's take a look at some scenarios that a buy-sell agreement can cover.
Transfer events
Buy-sell agreements can be designed to handle the circumstances that can arise when any of the following events happen to the shareholders of a closely held company:
- Death of a shareholder
- Disability of a shareholder
- Divorce of a shareholder
- Bankruptcy of a shareholder
- Sale of part or all of the company to a third party
- Retirement of a shareholder
- Involuntary termination of a shareholder
- Business dispute among shareholders
Needless to say, most of these events (the death or disability of a shareholder, for example) could cripple your company or your family if left unaddressed. But some events, like the involuntary termination of a shareholder, are harder to grasp. Rarely do owners anticipate that one day they might have to terminate the services of another shareholder. If they can imagine that scenario, it is rarer still that they can imagine the thorny problems that will arise. Is the terminated shareholder required to sell back his stock? Is the remaining shareholder or the company required to purchase it? In a divorce scenario (especially in a community property state) do you run the risk of ending up with your co-owner’s ex-spouse as a new co-owner?
Here are a few hypothetical but all-too-common problems that well-written buy-sell agreement can solve.
Sale of part or all of the company to a third party
You receive a call from a legitimate representative of a deep-pocketed private equity group who has identified your company as an acquisition candidate. They make an initial offer that would guarantee your family’s financial security for life. Imagine your surprise when a 25% co-owner responds to this offer, “Thanks, but no thanks. I’m just getting started and think we can take this company to the next level ourselves!” You call the private equity group back to offer your stock for sale, but they (like almost every third party owner) aren't interested in buying a part of your company. It is an all or nothing offer.
A well-crafted buy-sell agreement can stipulate that when a third party makes an offer to buy a company’s stock, the other shareholders must match that offer or must sell their shares to that third party.
Firing a shareholder
Twenty years ago three colleagues left a common employer and started their own company. The three equal shareholders knew exactly what they’d do differently and agreed on how hard they’d all work to reach their common goals. During the last five years however, one partner's behavior had become unpredictable. He missed important customer meetings and ignored his department’s performance. Finally, the other two shareholders asked the partner to resign. He refused. They reluctantly told him that he would have to leave and that they’d purchase his stock at the value agreed upon in the buy-sell agreement. He pointed out to his co-owners that their buy-sell agreement did not mention the involuntary “retirement” of a shareholder and refused to sell his shares.
A carefully considered buy-sell agreement can stipulate not only that a fired shareholder must sell his or her shares for the agreed upon value, but also that the remaining shareholders must pay for that stock.
Divorce of a shareholder
When the spouse of one of two business co-owners filed for a divorce, they learned that the spouse wanted, and in their community property state had a right to, half of one of the co-owners' share of the company. If the three of them couldn’t run the company together, the other partner would have to buy both of them out, and the spouse had an especially unrealistic idea of what their share was worth.
The two partners turned to their buy-sell agreement hoping they’d thought to plan for this event, but their agreement did not include a divorce provision.
We’re here to help
These are just a few of the situations that a buy-sell agreement may cover. If you determine that your company can benefit from a robust buy-sell agreement, talk with a Hancock Whitney Private Banker. We’re ready to help you build a build a team of experienced professionals who can assist in creating an agreement that will meet your company's unique needs.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this article is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional.
This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Exit Planning is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need. Any examples provided are hypothetical and for illustrative purposes only.
Hancock Whitney offers investment products, which may include asset management accounts, as part of its Wealth Management Services. Hancock Whitney Bank is a wholly owned subsidiary of Hancock Whitney Corporation.
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