COMPONENTS OF A BUY-SELL AGREEMENT

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  1. Date of the Agreement

  2. Description of Legal and Tax Status

a) Corporation (C or S type)

b) Limited Liability Company

c) Partnership (General, LP or LLP)

  1. Parties to the Agreement

a) all owners (as individuals or entities)

b) only certain owners participating (specifically)

c) business entity and/or owners (where one has priority over other)

d) trustee (see Grantor Trust Structure – Point 15)

e) spouse (consider spousal rights under community property states)

  1. Purpose of the Agreement (Preamble)

a) intent to accomplish a proper and legal purpose

b) consideration (mutual covenants)

  1. Statement of Each Party's Percentage Ownership of the Business

  2. Events Triggering a Purchase and Sale (optional or mandatory)

a) death

b) retirement (determine age)

c) voluntary (or part-time)

d) involuntary termination (define “for cause" reasons)

e) permanent disability (time of measurement, who determines if disabled)

f) involuntary transfer to creditors (e.g., caused by bankruptcy, divorce, etc.)

  1. Business Interest To Be Sold

a) entire interest of owner

b) entire interest of owner and family members (e.g. spouse, children)

c) partial interest (specify)

  1. Type of Buy-Sell Agreement

a) cross purchase (among the business owners)

b) entity purchase (redemption transaction)

c) trust purchase (f/b/o owners)

d) combination of owners and business

  1. Restrictions on Transfer of Business Interest (or Exceptions)

a) co-owners (free transferability at agreed terms or trigger ROFR?)

b) among family members (trusts f/b/o owner and family)

c) outsiders (3rd parties)

d) determine if rights of first refusal (ROFR) triggered

e) determine when/if drag-along and tag-along rights apply

  1. Determination of Purchase Price Due Selling Owner

a) fixed or agreed value (see Point 11)

b) book value (consider if goodwill included/excluded)

c) appraisal value (consider if minority and liquidity discounts apply or not)

d) capitalization of earnings formula

e) combination

f) consider penalty adjustments for breach of covenants (See Point 19)

  1. Valuation Considerations

a) value periodically (e.g., every 2-3 years) even if no pending transaction

b) what to do if no periodic valuation (if appraisal firm required)

c) what if owners fail to agree on firm market value (how resolved?)

d) what is value absent appraisal (e.g., multiple of revenue/EBITDA)

  1. Method of Funding Buy-Out Obligation

a) payment from future earnings of the business

b) borrowing (from banks or owners)

c) sinking fund (by business and/or owners)

d) installment purchase w/interest (e.g., 5-10 years)

e) life insurance (consider paying higher of FMV or policy proceeds)

f) combination

  1. Protective Provisions for Selling Owner

a) failure to make payments on notes and penaltiesfor default

b) collateral security for notes

c) accelerated maturity for business sale transactions

d) endorsement (and transfer) of stock/membership certificates

e) escrow agent requirement (bank or attorney)

  1. Life Insurance Funding

a) ownership of policies (grantor trust; owners, business)

b) beneficiary of policies

c) payment of premiums (owners or business entity)

d) restriction on exercise of ownership rights

e) purchase of additional coverage (e.g., key-man f/b/o business)

  1. Trustee for Grantor Trust (if utilized)

a) identity

b) compensation

c) duties and responsibilities

d) resignation, replacement and removal

e) investment discretion

f) exculpation

  1. Disposition of Insurance Policies (other than at time of death)

a) on life of retiring owner (lifetime sale only)

b) on lives of surviving or continuing owners

c) on business liquidation

d) any CSV in policy (reimburse business if paid premiums)

  1. Disability Buy-Sell

a) definition of disability (difference between S/T vs. permanent)

b) funding mechanism (insurance available)

c) disability waiting period (period of exclusion)

d) duration of payment (time related; maximum amount)

  1. Amendment and Termination of the Agreement

a) voluntary with consent of parties (unanimous or super-majority)

b) happening of specified events

c) rights of parties upon termination

d) disposition of insurance policies

  1. Restrictive Covenants (optional)

a) non-compete (define competing business and time duration)

b) non-solicitation (time duration and customers & employees)

c) non-disparagement (time duration)

d) confidentiality/trade secret protection

e) outside business interests of owners (passive vs. active)

  1. Miscellaneous

a) agreement binding on heirs and successors in interest

b) agreement to arbitrate claims other than where injunctive relief sought

c) prevailing party rights to attorney fees and costs

d) governing jurisdiction/law and venue location

e) require existing wills/trusts to conform to buy-sell agreement