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What is a Buy Sell Agreement?

Buy Sell Agreements are also called shareholder agreements, shareholder restriction agreements, and are sometimes simply provisions of an operating agreement of an LLC.

A buy sell agreement is akin to a pre-nuptial agreement between business owners.  What it does is set out the parameters of what happens to a shareholder’s shares upon a triggering event of an outside offer, or one of the five Ds: departure, death, disability, divorce, or deadlock.

A buy sell agreement is necessary to control the ownership of the company, keep it closely-held, and provide a mechanism to resolve disputes among owners.  They also serve to:

  • describe the rights and obligations of shareholders and future investors
  • describe privileges and protections of shareholders
  • setting forth voting agreements
  • establish dissolution provisions and rights
  • manage deadlock among shareholders of closely held companies
  • provide a mechanism for buyout of shares
  • dictate how a business’ assets are assigned in the event of death, disability or divorce of a shareholder

Buy Sell Agreements typically provide either a cross purchase mechanism or a share redemption by the company.  A cross purchase mechanism is where the remaining owners buy the shares from the departing shareholder.  A redemption agreement requires the business entity to buy the shares of the shareholder upon one of the triggering events.

One of the most critical parts of a buy and sell agreement is establishing the value of the company, which will then serve as value from which to calculate the price of each member’s units or shareholder’s shares. There are numerous ways to do this depending on the industry, including fair market value, book value, a formula based upon assets and receivables, or some combination of the above.  We often work closely with the company’s accountant to determine the best method to value the shares for the company’s industry.

If your closely held company does not have a buy sell agreement, it should consider the implications of not having one. The attorneys at Dalton & Tomich can assist with drafting a Buy Sell agreement for your closely held business. You may also be interested in our video about the importance of buy sell agreements to Michigan and Detroit businesses.

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