We recommend that parties to buy-sell agreements meet with their accountants, other shareholders, corporate attorneys, corporate business consultants, and financial planners, if appropriate, to review their buy-sell agreements. This team will enable them to discuss the business and legal aspects of your buy-sell agreement in detail. In addition, competent advice regarding business valuation aspects of the buy-sell agreement should be obtained. The business valuation expert should be able to identify issues related to the expected operation of the buy-sell agreement from a business valuation viewpoint and make suggestions to modify the text to correct identified issues. The questions presented below are a sample of those that can be found in Mercer Capital’s Buy-Sell Audit Checklist.

Selected Items to be Considered When Drafting or Reviewing a Buy-Sell Agreement:

NATURE, SIZE AND OWNERSHIP OF ENTITY

1. Parties to consider in discussions about the buy-sell agreement

• The company
• Employee shareholders
• Non-employee shareholders
• Active
• Passive
• Remaining shareholders who may not be subject to the agreement

2. Is the entity an S corporation? It may be appropriate to restrict stock ownership to eligible classes of shareholders. 3. Are there multiple classes of stock or ownership?

• Are all classes of ownership subject to the agreement?
• If the buy-sell agreement is applicable to only a certain class or classes of stock, what is the impact on other classes of ownership?

4. Are there two or only a few shareholders?

• Should all shareholders be subject to the buy-sell agreement?
• What happens or should happen if shares subject to the buy-sell agreement are transferred?
• If within family units, are they required to remain subject to the buy-sell agreement?
• If not within family units, are they required to remain subject to the buy-sell agreement?

• A cross-purchase agreement may be appropriate, where the shareholders can purchase life insurance to acquire the shares of deceased shareholders.
• If there are numerous shareholders, or if there are other reasons, it may be appropriate to have the company act as the purchaser for required buy-sell transactions.
• If the entity is of large value, even with a small number of shareholders, it may be appropriate to have the entity act as purchaser for required buy-sell transactions.

5. Are there groups of shareholders where it is important to maintain relative ownership between groups?

• Family groups may desire to have provisions to maintain relative family ownership, but to have freedom to transfer shares within the group.
• There may be a control group. It may be necessary to have provisions to ensure that this group maintains control in the event of buy-sell agreement transactions.

6. Are there older shareholders in the group of owners?

• Life insurance may not be available. It may be necessary to allow for purchase of their shares with a term note and to have agreement for this up front.
• If there are older shareholders, they will likely retire or die relatively sooner. Consider provisions to account for these eventualities.

7. Are there shareholders who will be employees and others who will be passive owners, even if on the board?

• What distinctions should be made between employee owners and passive owners in the buy-sell agreement?
• If a passive owner dies, should employee owners be allowed to purchase all or a portion of the shares directly, if they are capable? If so, they can increase their relative ownership if this is desirable.
• Should the employee owner purchases be pro rata to all employee owners, or is it desirable to have one or more particular employee owners make the purchases? Should the company assist with such transactions? If employee owners cannot make the transactions, should passive shareholders have the option to purchase the shares before the company acquires them? With such purchases, individually or cumulatively over time, should there be provisions to maintain control of the company in any particular fashion?

8. Are there state laws that will impact the ability of the company to redeem shares?

• If so, counsel will have to advise how to draft the agreement to ensure maximum flexibility for the company and minimum likelihood for problems with insolvency as result of operation of the buy-sell agreement.
• Counsel will also have to draft provisions to protect the company in the event that insolvency becomes an issue as result of buy-sell transactions.

9. Are there restrictions under loan agreements that could be triggered by buy-sell transactions?

• Such restrictions need to be anticipated, and provisions drafted to ensure compliance with the agreements and maximum flexibility to engage in buy-sell transactions.
• The lender(s) may have to approve these provisions in the buy-sell agreement.

10. Will there be a right of first refusal agreement (ROFR), either as a separate agreement or to be incorporated as part of the buy-sell agreement? [ROFRs may be appropriate if there is a desire to ensure approval of any new/additional shareholders]

• What will be the terms of the ROFR agreement? Some considerations include:
• Must there be a bona fide offer, in writing, from a buyer of proven financial capacity? If so, the right of first refusal may provide the ability for the company to purchase the shares on the same terms and conditions as in the bona fide offer.