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The basics of buy-sell agreements, Part II: Triggering events

In today's post, we are continuing a discussion we started last week about buy-sell agreements. If you co-own a business with one or more people, the company should be able to survive and experience minimal disruption if one of the partners can no longer retain a stake in the business. Buy-sell agreements are written with those goals in mind.

There are many events that can trigger a buy-sell agreement, and we will discuss six of the most common today. The specific ones you choose may depend on the life circumstances of the co-owners (shareholders) involved.

The first are circumstances that are both sudden and tragic, including death and disability. In the case of one shareholder's death, a buy-sell agreement can ensure that his heirs are compensated but that the shares stay within the company. For disability, make sure to define what constitutes a disability for purposes of business operations.

The second set of circumstances are more predictable and often come with more notice. They include retirement and termination of employment (both quitting the company and being fired). In short, if an employee-shareholder's work with the company needs to come to an end, a buy-sell agreement can reduce the volatility caused by the departure and reduce the potential for conflict and animosity.

Finally, the last two circumstances are very personal problems that could jeopardize the health and stability of the business. They include personal bankruptcy and divorce. In the event of personal bankruptcy, a buy-sell agreement could prevent the shareholder's shares from being distributed to creditors. In divorce, an agreement could prevent a shareholder's spouse from obtaining a stake in the company.

Like any business-related legal documents, buy-sell agreements are only effective if they are enforceable. As such, they should be crafted carefully and with the help of an experienced business law attorney.

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