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Think Ahead With Your Buy‑Sell Agreements

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Katlyn Graham:  Hello. I’m Katlyn Graham. I’m here with Jeff Doherty, an attorney at MacLean, Holloway, Doherty, Ardiff, and Morse. Jeff specializes in corporate law. Welcome, Jeff.

Jeff Doherty:  Thanks for having me.

Katlyn:  Thanks for joining us today. We’re discussing buy‑sell agreements. Jeff, what is a buy‑sell agreement?

Jeff:  A buy‑sell agreement is an agreement between or among business owners, as to the disposition of a business interest at particular points in time.

For example, in our firm we always counsel our corporate clients to deal with ‑‑ in the context of a buy‑sell agreement ‑‑ death, disability, and dispute.

Occurrences such as death, disability, or dispute are the triggering events for a transfer of the interest in the business from one owner to another.

Katlyn:  Those are usually the triggers?

Jeff:  That’s right.

Katlyn:  Does every business need a buy‑sell agreement when they are ready for that transfer?

Jeff:  We really encourage our clients to have one of these.

If you look at the three typical circumstances ‑‑ death, disability, and dispute ‑‑ those are major events, not only in the person and their family who’s affected by the individual event ‑‑ death, disability, or dispute ‑‑ but also for the ongoing owners of the business. How do they replace Bill or Sally?

It’s very often a period of high stress where people perhaps are not thinking clearly, where the objectives among the parties may not necessarily be in concert.

It’s much better to anticipate these types of events, sit down with and among your fellow business owners and say, “If this happens, this is what we’re going to do. If I die, this is what I wanted to have happen. It’s like a will. If we have a dispute, here’s how we’re going to resolve it.”

You do this at a period of time where cooler heads are in play, not necessarily the case when the actual event occurs.

Katlyn:  Definitely. Really thinking ahead, “If I die.” Planning that out before it’s anywhere near.

Jeff:  Exactly, because in the absence of an agreement, you’re faced with things like probate law.

I may have a very good relationship with you, but not your husband. If you were to die and we were business partners, now I have your husband as a business partner, for example.

He may not know anything about the business. He may not be interested in the business. So how do I replace you?

Those are the conversations you have to have, developing a buy‑sell agreement, to anticipate these events so that when the event occurs, and it inevitably does, the enterprise isn’t adversely affected.

Katlyn:  Are all these buy‑sell agreements the same or are there different types?

Jeff:  No, they’re not the same. Typically, there are three types. There’s a cross purchase agreement, there is a redemption‑type corporate purchase agreement, and there’s a hybrid.

With a cross purchase agreement, I agree to buy your interest, you agree to buy my interest. And there’s variations of that theme.

With a corporate buy‑sell or an entity redemption agreement, it’s the corporation, the limited liability company, the partnership agrees to buy my interest upon the triggering event.

With a hybrid, it’s a bit of a mixed bag. You might have the corporation agreeing to purchase my interest if I were to be the subject of the triggering event. That’s typically done with cash and note, and there might be insurance involved. That’s the third leg of the buy‑sell structure.

Katlyn:  Sounds like it could get pretty complicated.

Jeff:  It does get complicated. That’s why I think you need to have an experienced practitioner involved in the discussions among the owners.

Typically, at our firm, when we are counseling a client with respect to buy‑sell issues, we have everybody in the room. We talk about it.

You can spend a fair amount of time going through “what‑if” scenarios and making sure that you’ve anticipated the types of things that are most important to the people in question, the partners, to address what their concerns are.

That can be a very iterative approach. Sometimes, they don’t think about things that I’ll prompt them to think about, because I know that this is going to be an issue just from experience.

It’s important that there’s energy behind the discussions in the approach to trying to solve the issues.

Katlyn:  Have sort of a moderator in between the two sides?

Jeff:  Very much like that. It’s not so much legal advice necessarily in that context, but it’s giving them the benefit of my experience.

Katlyn:  Thank you, Jeff, so much for explaining all this. For more information, you can visit the firm’s website at mhdpc.com or call 978‑774‑7123.

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Katlyn:  Thank you, Jeff.

Jeff:  Thank you.

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Transcription by CastingWords

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