Advanced Issues in Buy-Sell Agreements
The dynamics within a business are numerous and all must be considered when reaching agreement on a buy-sell agreement. Various provisions can be included in the agreement to help owners ensure all are treated fairly. For instance, the agreement can include:
“Tag along rights.” These rights permit a minority owner to join in a sale a majority may be considering. Imagine if a majority owner is selling his or her interest and the purchaser is someone the minority owner cannot or will not want to be in business with for whatever reason. Or, consider if the majority owner obtains a favorable deal to sell his or her interest—the minority will have a difficult time equaling that value since the minority interest cannot offer control. These rights effectively require, at the request of the minority owner, the majority owner to include the minority’s holdings in negotiations with a purchaser—a right that is favorable for the minority holder. Of course, this might impact that majority’s value since the purchaser may be required to purchase the minority’s shares at a valuation which would be higher than if sold independently.
“Drag Along Rights.” These rights permit a majority owner to force minority owners to join in a sale. For majority owners, this right is important. Some purchasers do not want minority owners due to the complexity and legal risks that can come with them. Some minority owners would prefer to retain their holdings or use their position to drive up the cost of purchasing their shares. The ability for a majority owner to offer 100% ownership in a sale can enhance value.
Lists of permitted transferees. Transfers of shares can trigger rights under a buy-sell agreement. But, some transferees are agreeable to all existing owners and the existing owners would not intend to trigger rights in a buy-sell agreement if these persons acquired shares. For instance, existing owners may have no objection to the acquisition of shares by the child of an existing owner who has worked in the business many years as a significant contributor. A buy-sell agreement can carve-out such persons from various provision in the Agreement.
Put and call rights—a put right is a provision in a buy-sell agreement which allows an owner to demand that the company purchase his shares, often at a discount (e.g., 75% of fair market value. Conversely, a call right is a provision in the buy-sell agreement which allows a business to purchase an owner’s interest in the company, often at a premium (e.g., 125% of fair market value).
You can call Henry G. Grendell at 440-462-6503 for a free initial consultation to discuss your business succession plans.