Posted by , on June 13, 2014
A Buy-Sell Agreement is an important planning component for any business with more than one owner, member or shareholder. Members and shareholders will often purchase life and disability insurance policies on each other, but they neglect to take the additional step of negotiating and executing a Buy-Sell Agreement. Life and disability insurance only cover death and disability, but there are numerous other situations that can lead to a break-up and often the ones not covered by insurance are actually more likely to occur. Therefore, it is important to put in writing what will happen when and if those events occur.
The first step in negotiating a Buy-Sell Agreement is to decide which events will trigger the buy-out provisions of the agreement. Death and disability are a given, but other events that may need to be covered include the following:
- Divorce of a member/shareholder
- Retirement of a member/shareholder
- Bankruptcy or insolvency of a member/shareholder
- Criminal conviction of a member/shareholder
- Failure of a member/shareholder to perform duties as an employee of the company
- Voluntary departure of a member/shareholder
A few of these events, like divorce or bankruptcy, can have the unfortunate result of putting ownership of the company in the hands of a third party outsider, which can have a devastating effect on the remaining members’/shareholders’ ability to control the company, particularly if the ownership structure is 50/50 or if the member/shareholder at issue is the majority owner. A qualified attorney can help you draft provisions to avoid such a result and can also help you make other important determinations such as how to define disability and whether to structure the agreement as a redemption, cross-purchase or hybrid buy-sell agreement.
**Reiling Teder & Schrier, LLC is an Indiana Limited Liability Company. The information contained in this website has been prepared by Reiling Teder & Schrier, LLC for informational purposes only, and is not legal advice. The information on this website should not be relied upon to make any decision, legal or otherwise. If you have any specific questions or inquiries regarding any of the information contained in this website, you should consult with an attorney licensed in your state. The information contained in this website pertains only to matters of Indiana law and the laws of other states may be completely different from the laws of the State of Indiana.