As a Massachusetts small business lawyer, I have a love-hate relationship with the term “buy-sell agreement.” The term is technically accurate, but also terribly misleading. Yes, buy-sell agreements establish terms by which people can “buy” and “sell” ownership stakes in a company. However, these agreements are meant to address a far broader scope of events – called “triggers” – which could break up a partnership or threaten the company’s existence, even when no one is ready to “buy” or sell.” Put simply, a “trigger” is any event upon which a partner a) leaves the company or b) should have his or her shares bought out to avoid harming the company.
For instance, what happens if a partner owning 50% of a company decides to retire or resign? Legally the departing partner still owns a 50% stake, even though he or she will no longer be working for the company. The remaining owner will not want to keep splitting profits with the departing partner, nor continue to give that partner 50% of the votes on company matters. Yet without a buy-sell agreement which addresses resignation and retirement, the departing partner would legally have the right to continue demanding 50% of the profits and voting rights, and could also demand a buyout through a forced liquidation.
Other examples of “triggers” include the three “Ds” – death, divorce and disability. If a partner dies, his or her heirs legally inherit that partner’s shares, and all rights belonging to those shares. The same result occurs in divorces where a partner’s spouse can be (and often is) awarded a certain percentage interest in the company. The result in both cases is a forced partnership with a partner’s family. A buy-sell agreement, properly drafted by a business attorney, can avoid this result. Also consider what happens if a partner becomes disabled and cannot continue working. Unless a buy-sell agreement provides otherwise, he or she remains entitled to the same profits and other rights enjoyed before the disability.
The above “triggers” – retirement, resignation, and the three “Ds” – are only some of the many events that should be covered in a buy-sell agreement. If not planned for appropriately, triggers can create untenable situations and overwhelming financial liabilities for the business owners left behind. Therefore, any Massachusetts small business with multiple owners is well-advised to have a thoughtful buy-sell agreement prepared.