Buy and Sell Agreement with Regards to an Inactive Co-Shareholder

As a co-owner of a business, it’s important to have a plan in place for when one of the shareholders becomes inactive or wants to leave the company. A buy and sell agreement is a legal document that outlines the terms and conditions for buying out a co-shareholder’s interest in the business.

Why do you need a buy and sell agreement?

Without a buy and sell agreement, the remaining shareholders may face several challenges when one of their co-shareholders becomes inactive. The inactive shareholder may still have an ownership stake in the business, yet contribute little to no work or investment. This can create tension and conflict among the remaining shareholders, and may even jeopardize the success of the business.

A buy and sell agreement provides a clear process for how the inactive co-shareholder’s shares will be valued and purchased by the remaining shareholders. This can help to avoid disagreements or legal disputes down the line. Additionally, having this agreement in place can give potential investors or lenders more confidence in the stability and longevity of the business.

What should be included in a buy and sell agreement?

When drafting a buy and sell agreement, there are several key components that should be considered:

1. Valuation: The agreement should outline how the shares of the inactive co-shareholder will be valued, based on factors such as market conditions, the company’s success, and any outstanding debts or liabilities.

2. Trigger events: The agreement should specify what events would trigger the buyout, such as the co-shareholder’s death, disability, or retirement. This can also include a provision for the co-shareholder voluntarily leaving the company.

3. Purchase price: The agreement should establish the price at which the remaining shareholders will buy out the co-shareholder’s shares.

4. Payment terms: The agreement should establish the payment terms, such as whether the remaining shareholders will pay the purchase price in a lump sum or through installment payments over a period of time.

5. Funding: The agreement should specify how the buyout will be funded, such as through cash reserves, a loan, or insurance policies.

6. Dispute resolution: The agreement should outline a process for resolving any disputes that may arise during the buyout process, such as mediation or arbitration.

Conclusion

A buy and sell agreement is an essential component of any business ownership structure. It provides a clear process for buying out an inactive co-shareholder, which can help to avoid conflicts and legal disputes. When drafting a buy and sell agreement, it’s important to consider all the key components outlined above in order to ensure a smooth and successful buyout process.