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By: Patrick B. Mathis

When drafting a buy-sell agreement, the terms of payment are very important. The corporation or shareholders need to determine and specify in the agreement what terms of payment should be followed when fulfilling terms and provisions to shareholders. In some cases the full amount may be due at closing with the company or other shareholders responsible for securing financing to pay the selling shareholder. If life insurance is maintained by the company or other shareholders and shares are purchased, or being purchased on a term basis, and life insurance proceeds are received, in general the agreement should provide that those proceeds would be applied toward the purchase price.

Some agreements provide life insurance to shareholders. The life insurance would provide proceeds based that would be previously determined in the agreement. Assuming the life insurance is maintained by the company, when shares are purchased or are being purchased the life insurance proceed that are received should be applied toward the purchase price.

If the balance is to be paid over a period of time the obligation should be evidenced by a promissory note. This is often secured by a collateral pledge of the sold shares to the selling shareholder, a collateral interest in the corporation’s assets (which may be subordinated to third party lenders), personal guarantees of the other shareholders, or similar collateral protection. The note may also provide that the selling shareholder is to receive quarterly financial statements, have access to the books and records of the company, have a board position for a period of time, or similar protections.

In addition, the note should provide for an acceleration of the balance due upon a sale or merger of the company, change in control or other triggering events. The note may also provide for acceleration of payments based upon the profitability of the company during the period that the note is outstanding, as well as limits on expenditures such as shareholders salaries, capital expenditures, acquisitions, etc.

Professional Services Disclaimer: Please note that the information presented here is as an educational service, and while it contains information about legal issues, it is not legal advice. No warranty is made regarding the applicability of the information presented to a particular client situation, and the information set forth is not a substitute for original legal research, analysis and drafting for a particular client situation.