Business continuity: pay heed to the nuts and bolts of a buy-and-sell agreement
Last month, we looked at the issue of covering a "keyman" in a company. This month we will discuss the issue of shareholder continuity. A buy-and-sell agreement is one where the shareholders in a company [or partners in a partnership, or members in a close corporation, loosely referred to as shareholders here] undertake that on the death or disability of one of them, the surviving shareholders will buy, and the deceased or disabled shareholder will sell, their shares. The agreement normally determines a method of valuing the shares on death or disability. Life insurance is normally taken out on the shareholders' lives to provide the cash to finance the structure. Here are questions you should consider when structuring a buy-and-sell agreement: Do the shareholders want to cover disability? This is a double-edged sword. If disability is covered, then at least if a shareholder is disabled the other shareholders can buy him or her out, but the disabled shareholder may not want to be for...
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