It’s important to understand that every Buy and Sell Agreement (BSA) is different and has a separate purpose when put together and implemented. Because of the vast differences in BSA’s, using a standard form of BSA rarely accomplishes the needs and wants of the parties involved.
Each participant in the agreement has different purposes and objectives and looks at the transactions very differently. Neither party knows when the agreement will actually be needed, and what the triggering event will be. A triggering event could be death, disability, divorce, termination, bankruptcy, and other defined events. One thing that can is consistent in most cases is that when a triggering event happens, then each party becomes visionless to the other parties’ best interests, and only focuses on their own and best interests.
The two participants in a BSA are a seller and a buyer. They come in different forms, as individuals, trusts, or estates. Usually their purposes and objectives are very different, and there usually is a conflict between the parties.
While creating the BSA the parties tend to be very fair before a triggering event. This is because everybody is in the same position and no one knows who will suffer the future triggering event. This is a positive viewpoint, as the parties are reasonable and objective about the possible and various scenarios. Everyone’s objectives are personal, and range from financial, tax, to personal protection for their families. Having a designed BSA can offer the owners some satisfaction that their needs are documented and witnessed.
Objectives of BSA
- To provide a predetermined roadmap for the business based on a triggering event which may call for the sale of a participant’s ownership interest.
- To provide a guaranteed buyer for the owner’s business interest and to create a market for that interest.
- If funded through life insurance or some other means, the BSA will provide liquidity for the payment of the business interest and help the estate pay for the estate taxes and other settlement costs of the deceased owner’s estate.
- Can avoid an impasse between the parties in the event of a triggering event.
- To protect the company and surviving shareholder from subsequent competition, should a terminated owner wish to sell to a 3rd
- To avoid potential conflicts between the surviving owners and the deceased owners’ heirs, by creating a roadmap through the agreement at the owner’s death.
- Can level the playing field for the estate or deceased owner’s as the agreement gives the deceased owner a say on how settlement of their interest will be to their heirs and estate. Especially, when the surviving family have little knowledge of the business entity.
- Establishing the price and method of valuing the interest, establishing the terms of payments, and providing a method of funding for the payment of that purchase price.
- Can create job stability for minority owners and key non-owner employees.
- Can establish the value of the entity for tax purposes.
- Can preclude owners from selling their interest without the consent of others thus avoiding the third-party ownership or voting percentages.
- The agreement can restrict ownership to people who are actively engaged with the entity of full-time basis.
- Can improve the credit worthiness of the entity.
- Can avoid transfer violations/Licensing requirements.
- Avoid transfers to individuals that would terminate the S corporation status.
- Can dictate discounts for lack of marketability (minority interest discounts).
- Can provide for voting agreements where necessary.
- Can dictate what happens to in force life insurance policies on the terminated or surviving owners.
These are only a few of the many reasons for a buy and sell agreement, and the advantages of funding the agreement.