A buy-sell agreement is a legally binding contract between shareholders or business owners that outlines what happens if one of them wants to sell their shares or is forced to do so due to certain triggering events. In the context of buying a commercial property with a loan against it, there are several reasons why two shareholders would consider implementing a buy-sell agreement:
- Control and Decision-Making:
A buy-sell agreement helps maintain control and decision-making within the existing shareholder group. When one shareholder wants to sell their shares, the agreement can stipulate that the other shareholder(s) have the first right of refusal to purchase those shares. This ensures that the remaining shareholders have control over who becomes a co-owner. - Financing Considerations:
If the commercial property is financed with a loan, the lender may have certain requirements or restrictions regarding the transfer of ownership. A well-drafted buy-sell agreement can address these issues and ensure that the sale of shares does not violate any loan covenants or agreements. - Valuation of Shares:
Commercial properties can appreciate or depreciate over time, affecting the value of the business. The buy-sell agreement should include a mechanism for determining the fair market value of the shares at the time of sale. This can be crucial for both the selling and buying shareholders to ensure a fair transaction. - Funding the Purchase:
In the event that one shareholder wants to sell their shares, the buy-sell agreement can specify how the purchase will be funded. If the commercial property has a loan, the agreement can outline whether the purchasing shareholder will take on the loan or if alternative financing methods will be used. Life insurance policies can also be put in place as an additional layer of protection – enabling a financial solution in the event of death or total and permanent disability. - Mitigating Disputes:
The buy-sell agreement serves as a proactive measure to prevent disputes and conflicts among shareholders. It outlines the process and terms for share transfers, reducing the likelihood of disagreements when a shareholder decides to sell their stake. - Estate Planning:
In the case of death or incapacity of a shareholder, a buy-sell agreement can provide a mechanism for the orderly transfer of shares to surviving shareholders. This can be important for estate planning purposes, ensuring a smooth transition of ownership without causing disruptions to the business.
