Why do I need a Buy/Sell Option Agreement?

Why do I need a Buy/Sell Option Agreement?

In the absence of a Buy/Sell Option Agreement disputes between co-owners or their executors/beneficiaries following the occurrence of an Option Event are common. These disputes typically relate to:

  • Who may purchase the co-owner’s interest;
  • Whether the affected co-owner or their Executor can insist that the continuing co-owner(s) purchase the relevant interest;
  • Whether a deceased co-owner’s spouse/children (or other beneficiary) are entitled to keep the interest and participate in the running of business;
  • The price to be paid for the co-owner’s interest in the business;
  • How the price is to be determined in the absence of an agreement, and
  • When and how the price is to be paid.

What if ...

Imagine the implications for yourself and/or your family in the following circumstances which may arise in the absence of a Buy/Sell Option Agreement:

You have died unexpectedly

However, your co-owners are unwilling or unable to pay your Estate the value of your share in the business. Your Executor/Spouse may be forced to participate in the running of the business until a purchaser can be found. It is likely that your Executor/Spouse will end up accepting an amount significantly less than the true value of your interest in the business in order to realize some capital for the same.

You have suffered a permanent disability or serious illness/trauma;

Again, your co-owners may be unwilling or unable to buy out your interest in the business. You will likely end up not getting anything, or something significantly less than the true value, for your share in the business. If you were relying on the value of your interest in the business to pay off a Mortgage you may now suffer financial hardship and/or be unable to live as comfortably as you would have liked, especially in view of your unfortunate circumstances.

One of your co-owners has suffered a permanent disability or serious illness/trauma or died unexpectedly;

You feel sorry for your co-owner or deceased co-owner’s family but either can not afford to buy out their share of the business or do not consider that such a purchase is a good commercial decision for you and your family at the time. You object to the eventual proposed purchaser of the deceased co-owner’s share of the business and/or can not agree on management and/or operational decisions. You eventually end up in dispute with the new co-owner. Your equity in the business diminishes or the business fails as a result of the internal dispute.

Alternatively, your disabled co-owner or deceased co-owner’s family want to maintain an interest in the business and actively participate in management decisions and operations. You would prefer to buy out the interest in the business but they do not want to sell or demand an unreasonable price. You do not agree with their suggestions for the management operation of the business and end up in dispute. Your equity in the business diminishes or the business fails as a result of the internal dispute.

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By Sam Roberts,
Managing Director, Accredited Specialist (Commercial Litigation)