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How can a properly drafted Buy-Sell Agreement ("BSA") protect my business interests?

A: There are many well-intentioned goals which a well-drafted BSA achieves.  Some factors will invariably be more important than others depending on the type of business situations, and include, but are not limited to:

• Predictability and Continuity of Ownership. A well-crafted BSA provides a clear and precise roadmap regarding the ownership of the business and, in many cases, the management thereof. Absent a BSA, businesses would face ownership transition issues at the worst possible time, such as upon the death or other departure of key executive personnel. A BSA cannot remove the issues of replacing departing executives or investors, but it can minimize the risk of the uncertainty over how and under what conditions company interests will be disposed of or retained;

• Orderly Transfer of Ownership. Related to the benefit of predictability and continuity is the orderly transfer of ownership. Restrictions on transferability of shares can minimize the chances that a business will be disrupted by the sale or threatened sale of membership interests to an unwanted party or competitor or by a dissident block. Advance determination of the rights to obtain ownership interests in company creates a sense of balance and order. As will be discussed in more detail below, a BSA should attempt to strike the delicate balance between a financial owner's desire to monetize its investments in a reasonable period with key executives' desire not to financially impair the business or sell out too soon. In family businesses, a BSA should also strive to provide a means for family members participating in the business and those not participating in the business to structure their relationship;

• Create a Market for the Ownership Interests. Most BSAs involve privately- held businesses, where the ability to resell ownership interests may be legally restricted or impractical. BSA's ameliorate the lack of liquidity by providing exit mechanisms for business owners in a variety of circumstances;

• Establish a Fair Price for Ownership Interests. Valuing closely-held businesses is more of an art than a science. BSAs can provide a known, objective and definable means of valuing the seller's interests depending on the circumstance of departure;

• Protect Minority Owners. BSAs assist in limiting some methods that majority interest holders utilize against minorities. For example, BSAs may require distributions be made to all owners in a minimum amount equal to their putative income tax liability based on the business' net profits for the year. Absent such a provision, the minority owner in a pass-through entity would have phantom income but no cash to pay the taxes. BSAs could also give rights to minority owners to have supermajority and other voting rights to provide disproportionate input, to limit salaries and other payments to the majority and to sell their interests at various intervals;

• Protect Majority Owners. BSAs can also protect majority owners from the intransigence or hindrance of minority owners. Frequently, minority owners many either not be active in the business, have supermajority protection rights, ask many questions, or simply not share the same philosophies regarding the direction and goals of the business. BSAs may devise means by which majority owners may purchase the minority's interests and limit the amount of involvement and information to which the minority is entitled;

• Assist in Setting Values for Estate Tax Purposes. The Internal Revenue Service ("IRS") and applicable state counterparts scrutinize values placed on the interests of closely held businesses in a decedent shareholder's estate. A BSA will give some degree of credibility to the valuation methodology. The IRS generally will respect the values determined in accordance with the BSA in most cases if non-family members are also parties to the BSA, since their presence shows an arms' lengthbona fideagreement; and

• Provide Liquidity to Pay Estate Taxes. Many times a business owner's biggest asset is her interest in a closely-held business. While tax laws provide for estate tax deferrals or installment payment of taxes in certain circumstances as will be addressed below, BSAs provide a means to monetize this asset to generate funds to pay these taxes.

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