Many New York companies employ a buy-sell agreement to sell a person’s ownership share of a business to another partner or to shareholders in the event the owner can no longer function as an active participant in the company. The key to activating a buy-sell action is a triggering event. Any buy-sell agreement should clearly spell out what the company considers to be a triggering event so there is no doubt that the sale of ownership can take place.
According to Upcounsel.com, there are a number of scenarios business owners will generally define as triggering events. A partner may retire from the business. A tragic accident can leave a partner disabled and unable to function. If partners in a business are married and decide to divorce, this can also serve as a triggering event. One of the partners may also unexpectedly pass away. Sometimes a triggering event can be if someone does not fulfill a contractual obligation, such as making an investment in the company at an appointed time.
Fitsmallbusiness points out that buy-sell actions can also be employed when conflicts between partners or owners reach a fevered pitch. When disagreements are irreconcilable, a partner may leave the business. A buy-sell arrangement prevents the exiting owner from demanding an unfairly large price for his or her ownership stake and from selling off the ownership to an undesirable third party. Buy-sell agreements may also be used to force out owners who engage in criminal actions or lose mental stability and engage in reckless behavior.
Additionally, business owners should take the personal financial state of their partner into account when drafting a buy-sell arrangement. In the event a partner declares personal bankruptcy, the other partner or shareholders retain the option to buy out the insolvent owner. Otherwise, a bankruptcy court may decide to go after the insolvent partner’s ownership share to pay off creditors.
The range of triggering events can vary by business. The same possible scenario does not always need to trigger a buy-sell action for every business. For instance, the death of a partner might not be crippling to a company if there is still a vibrant, capable partner who can handle the operation, and so no ownership succession is needed. Also, some contracts can simply pass on a partner’s stock or ownership to the partner’s spouse or family member without a buyout option.