Why are buy-sell agreements so important in closely held businesses?
When you go into business with someone else or buy stock you are always doing so from an optimistic perspective. You wouldn’t be buying in and putting your time or money on the line if you thought things were likely to go south, or even sideways on you. But they do.
A ‘buy-sell’ or shareholders agreement governs how stock is traded, and in this case specifically the sale of shares to outside parties. It lays out when stock can be sold, who to, the rules of selling that stock, and often how much for.
This is particularly important in a closely held business. According to Pew Research there are a lot more closely held businesses than most think. In fact, despite what the name some of these are very large corporations with tens of thousands of employees. Pew Research identifies some of these as family owned firms like Cargill which has 140k employees, and had revenues of almost $140B as of 2013. Hobby Lobby which is another multi-billion dollar firm and is ranked on Forbes has around 23,000 employees. There are also over 4 million S Corporations which may also be considered closely held companies. So these companies run from very small family businesses and partnerships to massive global entities. The current surge in real estate crowdfunding and other structures under the JOBS Act could fuel the birth of many more organizations in this category. Note that according to the IRS the official definition of a closely held corporation is one which has 50% or more of its outstanding stock owned by 5 or less individuals, and is not a personal service corporation.
With so few shareholders and ownership and control is dramatically more important than in a massive publicly traded corporation that many have thousands of small stakeholders. This means the impact of a single party can significantly change the company, its direction, performance, and value, as well as the value of shares.
Factors that can have heavy negative influence potential here can include disagreements between owners, disability, mental incapacity due to age or substance abuse, or death. If a large portion of shares are transferred who knows what that person will do with that control? They could resell them, hurt operations, devalue the company, and wipe out other shareholders yields and wealth. The buy-sell agreement is instrumental here to regulate how shares can be transferred, even in the case of death. Sometimes this will include specific share price calculations, first right of refusal to purchase shares by existing owners, etc. Just know that it is always easier when a written legal framework is in place, and one which was created when things were amicable and objective.
Authored by Titanium Asset Protection
Titanium Asset Protection is an elite asset protection firm with licensed California attorneys on staff who specialize in asset protection, trusts, corporate law, succession planning, bankruptcy, real estate, and tax law. Our team has successfully represented clients to the highest levels of the justice system in fighting to protect them, and their finances, with lead counsel Matt serving as the Ethics Chairman for Le Tip International, The Chapter of Orange for 15 years, being an honored member of the revered Wealth Counsel.