Essential Elements of a Company’s Buy-Sell Agreement

A buy-sell agreement is designed to manage the transfer of ownership interests in a company when specific, predefined events occur. It is typically part of the company’s organic document, such as a corporate shareholders’ agreement, a partnership agreement or an operating agreement in a limited liability company (LLC). By providing a structured approach to handling changes in ownership and management, a buy-sell agreement helps ensure the company’s operations continue smoothly.

Buy-sell agreements are activated upon the occurrence of certain triggering events. These include the transfer of ownership interests or shares in the company, the exit or withdrawal of owners and the associated rights concerning the repayment of capital and the retirement of any owner along with their consequent rights and obligations. Other triggers might be the insolvency or bankruptcy of an owner, the termination of employment for an owner or a deadlock or dispute among the owners. Each such situation requires a predefined response.

When drafting a buy-sell agreement, several key provisions should be considered to address these events effectively:

1. Rights of first refusal, cross-purchase and redemption — These allow the company, other owners, or both to buy the interests or shares of a departing owner before they can be sold to an external party. 
2. Buy-out rights — These rights enable an owner to offer to buy out the interests or shares of other co-owners, potentially consolidating ownership if desired.
3. Pre-emptive rights — When new shares or units are issued by the company, these rights allow existing owners to purchase sufficient shares or units to maintain their proportional ownership, protecting against dilution of their interests.
4. Management or employment rights — These provisions ensure that owners can retain agreed-upon directorship, management or employment positions within the company, with specified terms of compensation.
5. Dividends, distributions or other compensation — These provisions mandate the company to issue dividends, make distributions or provide other forms of compensation at predetermined times and amounts, as agreed by the owners.
6. Valuation — The agreement should include a method for valuing ownership stakes that is agreed upon in advance. This could be a fixed price, a formula based on the company’s performance or the use of an external appraiser. 
7. Financing — There should be provisions for securing the necessary funds to purchase the interests of a departing or deceased owner, so that the company can continue to operate without financial strain. Buy-sell agreements are often supported by insurance policies written to pay benefits upon occurrence of triggering events
8. Dispute resolution — A clause should outline agreed-upon methods for resolving disputes or deadlocks, whether through mediation, arbitration or other forums.

An Arizona business lawyer can draft a comprehensive buy-sell agreement that is tailored to your specific needs, one that protects the interests of all parties and the company’s viability.

At Law Offices of Donald W. Hudspeth P.C. in Phoenix, we draft reliable buy-sell agreements for companies throughout Arizona. Call us at 866-696-2033 or contact us online to set up a consultation.