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Besides having a general agreement about ownership and responsibilities, every business with more than one owner should have a buy-sell agreement. What is a buy-sell agreement? It is an agreement that outlines how and when an owner can sell shares and at what price. Ultimately, this agreement should be signed prior to the business geting started, but if not, write one up now. If something goes wrong, negotiating without a buy-sell agreement is difficult and could potentially end up in court.

A buy-sell agreement should specify triggers that will set the guidlines in motion. Below are some examples of possible triggers:

• If an owner retires, you may not want to allow them to continue to hold their shares.

• If an owner gets divorced or declares bankruptcy, you may want to protect the business from the spouse and/or the courts.

• If an owner dies, you may want their shares to be sold to existing owners rather than passed to their family. (Companies often take out life insurance on each partner, allowing them to purchase the shares of a deceased partner if necessary.)

Drag-along and tag-along provisions may also be added to a buy-sell, which specifies that if the majority owner(s) want to sell to a third party, they can force the sale of minority owners. The tag-along promises a minority owner(s) the same proportionate price as majority owners in a sale. These provisions are important as they affect the marketability of a company.

A shotgun clause is useful for two person partnerships as it stipulates that one partner can offer to buy out the other at a price they choose. The other partner must then accept the sale or buy the company for the same price. As this clause seems to favour the wealthier of the two partners, the poorer one may want to specify that the buyout can be funded over time or with profits from the ongoing business.

Lastly, the buy-sell should require a right of first refusal. This means if a partner finds an outside buyer for his shares, they must first offer those shares to the existing owners, who must match the outside buyer’s price. This shields the remaining partner(s) from suddenly running the company with an uncertain new owner.

10 Questions to Ask Your Partner (Before You Sign a Buy-Sell Agreement)

1. What will your role in the business be and what do you expect mine to be?

2. Who will be the CEO?.

3. How will we split ownership, divide profits/losses and be paid? (If you are equal partners be careful about giving ownership to an employee as it effectively gives them a swing vote in any partners’ dispute.)

4. How are decisions going to be made?

5. Do we share the same values? There are important moral issues to be discussed.

6. What method of communication do you prefer?

7. Do we share the same sort of work ethic?

8. Are your finances in order?(Remember that lenders are likely to check the credit history of both business partners; therefore, make yourself familiar with each others credit rating, spending habits etc.)

9. Where do you want this business to be in 5, 10 and 20 years? (Make sure that your goals are aligned.)

10. Should I check references? As with any business relationship, you need to know your future partner’s personality and business reputation. Checking references is recommended (i.e. vendors, Google, family, friends, etc.). Go on social outings.

After asking all these questions ask yourself: am I ready to sign this buy-sell agreement? For more information on buy-sell agreements, please feel free to contact us at <info@ayrtonfinancial.com>
or 604-687-6808.

Glenn Ayrton is registered as an Investment Advisor through Sora Group Wealth Advisors Inc., a Member of the Investment Dealers Association of Canada and the Canadian Investor Protection Fund (CIPF). This information is general in nature, and is intended for educational purposes only. For specific situations you should consult the appropriate legal, accounting or tax expert. The information contained herein was obtained from sources believed to be reliable, however, we cannot represent that it is accurate and complete. This editorial is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any securities. The views expressed are those of the author and not necessarily those of Sora Group Wealth Advisors Inc.