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Buy-Sell Agreements And How To Enforce Them

When a business owner is ready to sell the business or has to due to disability, illness or retirement, a buy-sell agreement outlines how the business is to be sold. The agreement provides a formula for the company’s ownership team to follow when selling a company or the share that belongs to the partner who is disabled, deceased or retired, or simply wants to exit the company. The share may be sold to shareholders, proprietors, partners or a key employee. In the event of a sale due to a partner’s death, the deceased individual’s estate must agree to the sale.

A buy-sell agreement is an important document for any business. They are most often used by closed corporations, sole proprietorships and partnerships. Work with an experienced business lawyer to draft your buy-sell agreement and ensure that it is legally enforceable.

Purposes Of A Buy-Sell Agreement In Wisconsin

A buy-sell agreement can be used to ensure that all shares of a company stay in the possession of partners and shareholders in the company, rather than potentially becoming property of partners’ former spouses and beneficiaries. When a partner exits a company due to personal bankruptcy, his or her share of a company could potentially become bank-owned property or be subject to control by his or her creditors.

With a buy-sell agreement, a company’s ownership team can keep the company under control in the event of a:

  • Death
  • Disability
  • Retirement
  • Illness
  • Divorce
  • Bankruptcy
  • Loss of interest in continuing with the company on a partner’s part

The buy-sell agreement can act as an exit strategy for a company’s partners and shareholders. It can also provide conflict resolution guidelines before conflicts occur, which can make resolution a faster, less stressful process for all parties involved. For a company that anticipates senior members eventually retiring, a buy-sell agreement can be part of an ownership succession plan.

Important Buy-Sell Agreement Terms

Developing your buy-sell agreement should be a collaborative effort between you, your business partners and shareholders, and an experienced business lawyer. Your buy-sell agreement should include the following items:

  • An outline of triggering events. These are the events that cause the buy-sell agreement to spring into action, such as retirement, death or divorce
  • A valuation plan. Possible valuation methods to use include:
    • A fixed price plan, which means that each share in the company is assigned a specific dollar amount to be paid to recipients at the time of the triggering event
    • A pricing formula, which involves multiple considerations to determine a price for each share. A pricing formula might include a company’s book value, which is the difference between its assets and liabilities or it could hinge on a multiple-of-earnings formula, which represents the return an investor could realistically expect from obtaining the company at a specific risk level
    • It could be simplest to have a third party value your business to determine a fair buyout price. This can be the most effective way to ensure current market conditions are considered when valuing the shares
  • How the business sale is to be funded. This can be through cash, insurance proceeds or debt
  • Which parties can and cannot purchase shares in the company

It is important to consider all tax burdens imposed by your agreement before signing it. It is also critical that all parties named in the agreement know their rights, their roles and their responsibilities at a triggering event.

Resolving Buy-Sell Agreement Disputes

When a dispute arises regarding the terms or enforceability of a buy-sell agreement, the parties involved can find themselves in an emotionally trying, expensive court battle. Solid enforcement of a buy-sell agreement can prevent disputes from arising.

Many business disputes are resolved through arbitration, a form of alternative dispute resolution (ADR) that takes place outside of the courtroom. In some cases, business disputes are resolved through mediation, another form of ADR that puts a greater emphasis on the involved parties working toward a resolution through collaborative means. When you draft your buy-sell agreement, you can include a clause about how any disputes that arise are to be resolved.

Work With Us

Work with an experienced business lawyer to craft an effective buy-sell agreement for your company. Having a valid buy-sell agreement in place will help you and others at the company’s head make important decisions and avoid conflict in the future. To start working on your buy-sell agreement with one of the experienced Appleton business lawyers on our team, contact us today to schedule your initial consultation in our office with a skilled Wisconsin business and civil litigation attorney. Call 920-202-8872 or send us an email.