An essential part of starting a business is preparing for the day when one of the owners sells his or her shares due to retirement, disability or other circumstances. A shareholders’ agreement, also known as a buy-sell agreement, sets the terms upon which an owner can be bought out or otherwise sell or transfer shares without disrupting the operation of the business. Such an agreement is also an important part of estate planning, both in terms of providing retirement income as well as in defining the rights of spouses and others who inherit a deceased owner’s shares.

 In a small business, a buy-sell agreement typically places restrictions on who can be a transferee of company stock upon the retirement or resignation of an owner, the disability or death of an owner or a foreclosure on an owner’s shares that secure a debt. It sets out the process by which a shareholder exiting the business gives notice to the other shareholders, offering them the option to purchase his or her shares. The agreement further provides a method of valuing the shares as well as a means of funding the buy-out by other shareholders. It also lays out how the outgoing shareholder is paid for the shares, which may be in a lump sum or in installments over time. 

Another important part of a buy-sell agreement is providing for what happens when shares are inherited by a spouse or other family members upon a shareholder’s death. The beneficiaries would be subject to the agreement’s restrictions on sales or transfers of shares to third parties. However, the agreement can mandate a procedure for liquidating the shares and providing a death benefit based on a predetermined method of valuation. A life insurance policy held by the company on behalf of the shareholder is a common way of funding this type of arrangement. Some agreements similarly provide for a mandatory buy-out by the company in the event of a shareholder’s mental or physical disability. 

A buy-sell agreement that has been drafted by a knowledgeable business law attorney will protect the company’s continuity by allowing an orderly succession of control when a shareholder leaves, whether voluntarily or due to unforeseen circumstances. It can also provide a way to transfer wealth to the shareholder’s heirs while keeping stock ownership under company control.

 If you are a business owner or are engaged in forming a business in Arizona, the Law Firm of Joseph M. Udall, PLC in Mesa can assist you in drafting a buy-sell agreement and preparing other essential corporate documents. For a free consultation, all us at 480-500-1866 or contact us online. Saturday and evening appointments are available.