SME Founder : Why enter into Buy-Sell Agreements

SME Founder: Have you heard of a situation whereby two SME Founders start a successful business and then the business falls apart after one of the two founders passes away?  One reason for this is that the children of one founder (from their inheritance) have different ideas on running the business from the remaining founder.  Some children just want cash and do something different from the family business and other children want to run the business differently from their father and often clash with their father’s business partner.

One solution that a good corporate lawyer would suggest to mitigate such a situation is for the two existing founders/shareholders to enter into a buy-sell agreement and indicate clearly that such agreement will bind their descendants or successors in title.

 #1: What is a buy-sell agreement?

For an SME Founder, a buy-sell agreement allows for one party to offer to sell its shares to the other shareholder at a pre-agreed price which can be based on a valuation to be carried out on the company. 

#2: Why does a SME Founder need to enter into a buy-sell agreement?

This pre-agreement, prevents the descendants having to sue the remaining shareholder to force a sale or trigger a winding up application for the underlying company.  Instead they can follow a pre-agreed mechanism for parties to exit the shareholding of the company.

This allows the respective families of the shareholders to remain on speaking terms and exit on amicable terms.

#3: What are the key terms of the buy-sell agreement and why is it important for a SME Founder?

Parties can discuss whether to have a put or call option or just a right of first refusal mechanism in this agreement.  We will go through each of these concepts briefly.

Put or Call Option

This is a mandatory right, which says that the holder of such right can either buy shares from the other party or sell shares to the other party once such right is exercised.

Right of First Refusal

This is a right that each shareholder gives to the other shareholder to say that before a shareholder can sell his shares to a third party, he must offer such shares at the same price and on similar price to the remaining shareholder.

For both options, the key commercial point that will be discussed is the price of the sale shares and how such price will be determined.

Pricing Issues

As a commercial point, if the proposed sale price is less than 1 million, parties can decide on a common accounting firm to do a valuation at the point of sale. 

If the proposed sale price is more than 1 million, we usually propose a 2 stage valuation exercise:

1. Company to appoint a common valuer paid by the company and if the valuation is accepted by both parties, it shall be binding, if after a certain period it is not accepted by the valuer; then

• The selling shareholder to appoint its own valuer at its own cost, then

• The final selling price shall not be lower than the average of both valuations.

Drafting such detailed pricing valuation mechanisms are complex activities so you should seek advice early with a commercial lawyer who is familiar with such documentation.

In conclusion, a buy-sell agreement is good for a business owner for peace of mind to prevent litigation between his children and his existing business partner.  It is always good to plan ahead of time to ensure that your business goes on into the next generation and also to maintain good relations between the business families. It is always best to seek good legal advice from a good corporate lawyer when planning through such exit provisions with your business partner well ahead of time.

If you have any comments on our article, please leave a comment below.

https://www.SingaporeLegalPractice.com is a corporate law and commercial law education website headquartered in Singapore which aims to demystify business law and 新加坡商业法 for SME Company Owners, Startup Founders and 新加坡新移民老板。The information provided on this website does not constitute legal advice. Please go to our contact us page and contact us and we will arrange for a lawyer to speak to you.  Please obtain specific legal advice from a lawyer before taking any legal action.  Although we try our best to ensure the accuracy of the information on this website, you rely on it at your own risk.