What is a No-Sell Buy / Sell Agreement
What is a No-Sell Buy / Sell Agreement
In the best cases, a family business is a legacy that benefits all members of the family even after the founder(s) have passed away. This is often a key objective of company foundersto provide a continuous source of prosperity for future generations of the family unit. These business owners want their family to continue to benefit in the business's success after they die. They need some kind of mechanism that ensures this continued benefit.
A no-sell buy/sell agreement is such a mechanism.
This agreement has a fairly simple structure. The business is recapitalized into voting and non-voting shares, each owner receives one voting share and 99 non-voting shares. Upon the death of one of the owners, the deceased's voting interest is bought by the surviving owner per the terms of the buy/sell agreement. The non-voting interest of the deceased owner remains with their family. This way, if the business does grow significantly, the family of the deceased will share in the growth. The control of the business remains in the hands of the surviving owner while the family of the deceased owner has non-voting interest in the business and cannot expect to see any money out of the deal until the business is sold.
This is an excellent arrangement when the owners are family members such as siblings. It is an appropriate option when the business is in the growth stage and is involved in technology or an innovation where there will be significant growth. We have also done this many times on real estate transactions where the ultimate value of the real estate will be worth many times its value today.
There is a downside to this arrangement that needs to be considered. The surviving owner must continue to run and grow the business, assuming all of the liability, and will only realize their portion of the value when the business is sold. The family of the deceased owner(s) receive their portion of the value, whatever that is at the time of the sale.
It is important to remember that we do not have a crystal ball and have no way of predicting the future. If the owners want a no-sell buy/sell agreement in place, it should be done as soon as possible. As an example, I designed a arrangement for three brothers some years ago. The youngest brother was 54 and the two older brothers were 60 and 63. The 54-year-old was sure that he would be the last to die and lamented how he would have to work harder and longer than his brothers who would certainly die before him. It seemed unfair to him that he would have to share the sale proceeds with his brother's families.
As fate would have it, the younger brother died of cancer 18 months after the agreement was put into place. The older brothers went on to work in the business for another 15 years. The business was worth approximately $2 million at the time of the death of the youngest brother; when the surviving brothers sold the business 15 years later, the sale price was $15 million. The deceased brother's family received about $5 million as their portion of the sale proceeds. The no-sell buy/sell worked well in this case, especially.
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