WRITTEN BUY-OUT ARRANGEMENTS
Corporate Buy-out - Selling Shares - Forced to Sell - Buying out Shareholders - Buying into Company
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Written buy-out arrangements (whether contained in unanimous shareholders agreement, partnership agreement of stand-alone buyout agreement) are critically important for businesses with multiple owners (shareholders / partners), including:
A. Ensures Business Continuity and Stability
A written buy-out arrangement provides a pre-determined plan for the smooth transfer of ownership when a "trigger event" occurs, such as an owner's death, disability, retirement, divorce, bankruptcy, or disagreement. This prevents the business from being disrupted, forced into dissolution, or having its operations stalled by uncertainty or disputes.
B. Controls Ownership and Keeps it Within the Desired Group
The buy-out agreement can restrict who an owner can sell their share to, preventing an unwanted or unqualified person (like a deceased owner's heir, a divorcing spouse, or an outside investor) from becoming a co-owner. It helps maintain the control and vision of the remaining active owners.
C. Establishes a Fair and Agreed-Upon Valuation
The buy-out agreement typically sets the price or outlines a clear method (like a formula or appraisal process) for determining the value of an owner's interest at the time of the buyout. This eliminates potentially emotional and costly valuation disputes when an exit event occurs, ensuring a fair price for both the departing owner/their estate and the remaining owners.
D. Provides a Market for the Owner's Share
For owners of a private business, their ownership interest is often illiquid. A buy-sell agreement provides a guaranteed buyer (either the business or the other owners) for their shares upon a trigger event. This is especially vital for the owner's estate in the event of death, ensuring their heirs receive cash instead of a difficult-to-sell business interest.
E. Facilitates Funding for the Buyout
A written buy-out arrangement specifies how the purchase will be funded, often through life insurance, disability insurance, installment payments, or the business's cash reserves. Having a funding mechanism, especially insurance, ensures the money is available when needed, preventing financial strain on the remaining owners or the company.
F. Minimizes Legal Disputes and Litigation
By clearly setting forth the rules, processes, and valuations in a legally binding contract before a problem arises, the agreement significantly reduces the potential for conflict and expensive, drawn-out lawsuits between partners or with a departing partner's family.
The value of advanced planning and the engagement of an experienced legal professional in developing and presenting a buyout offer cannot be overstated, as its financial significance can be considerable. The opportunity for strategic planning is best undertaken prior to putting forth the buyout offer, with the degree of pushback and negotation often providing invaluable insights that can be applied to the buyer's advantage.
For knowledgeable and experienced legal representation when initiating a corporate buy-out, from the analysis and development of a buyout offer, through to the completion of the business acquisition, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
