Buy-Sell Agreements Are Legal Contracts

p>What is not clearly understood, however, is thatcorporation and the shareholders are aligned, or they
they are also business and valuation documents. Weare not sufficiently misaligned to prevent agreement
refer to the agreements as business and valuationfrom taking place. Perhaps, because of this, despite
documents because they represent contractualthe best efforts of a corporation's counsel, the
agreements between the respective partiesshareholders often do not, prior to the initiation of a
concerning:buy-sell agreement, take sufficient time to
understand the exact nature of the agreement, how
1. The business objectives they are designed toit will work in the future, and the implications for
facilitate; and,them (whether they will be a buyer or seller in future
2. How the pricing and terms will occur. In othertransactions).
words, they determine how the valuation ofA brief focus on the term itself is instructive:
businesses (or business ownership interests) will be
determined in future transactions that may or will1. Buy. They specify the conditions under which one
occur.party, or the company, will purchase the equity
A general definition or description of buy-sellinterest of another party upon the occurrence of
agreements offered from a business perspectivespecified trigger events.
follows:2. Sell. They specify the conditions under which one
Buy-sell agreements are agreements (contracts) byparty, or the company, will sell its equity interest
and among the shareholders (or equity partners ofupon the occurrence of specified trigger events.
whatever legal entity) of a business and, perhaps,3. Agreements. They are legal agreements. They are
the business itself. They establish the mechanism forsigned by parties, often at the beginning of a
the purchase of equity interests following the deathbusiness relationship, and represent collective
(or other adverse or significant changes) of one ofagreement, or at least contractual acquiescence, to
the owners. In the case of corporate joint ventures,their terms.
they also establish the value for break-ups or forBuy-sell agreements are necessary because no one
circumstances calling for one corporate ventureknows, at the time of signing, who will be the buyer
partner to buy out the other partner.and who will be the seller. No one can predict the
They are important because they representfuture. As Yogi Berra says: "The future is hard to
agreement between a corporation and itspredict. It hasn't happened yet." It is, therefore,
shareholders regarding how the future transactionsimportant that agreements be satisfactory from a
contemplated by the agreements will occur. It isbusiness standpoint to all parties, whether ultimately
important to note that at the time most buy-sellthey will be future buyers or sellers pursuant to their
agreements are initiated, either the interests of theparticular buy-sell agreements.