Business Continuation Closely Held Corporations: Corporate Buy Sell Agreements Consequently, a prearranged agreement to retire a stockholder's interest following death is vital for the surviving stockholders of a closely held corporation.

Some of the problems are:

§    The stockholders of a closely held corporation are also the officers of the corporation

§    Earnings to the stockholders are usually paid in alaries.  

§    There usually is no available market for the stock. 

Options to the surviving stockholders are: 

§       Accept an adult heir of the deceased into the actual management of the firm. An adult heir would normally contribute little to the management of the business and might well be a constant source of disruption in its operation
 

§       Pay dividends, approximately equivalent to the salary of the deceased stockholder, to the heir or heirs without any participation in management on their part. Survivors would have the burdens of management but would be sharing the their profits equally with heirs who are contributing nothing but capital to the business.
 

§       Accept into active management of the firm outside interests to whom the stock of the deceased may have been sold. Associates in a closely held corporation join forces because they work well together and each has a certain contribution that, taken together, produces profitable corporation. In many cases, the outsiders may well not be acceptable and lead to a disruption of the business or, in extreme cases, even to liquidation of the firm. If the outsiders' stock constitutes a majority interest, the survivors would be at the mercy of the new owners, who would control such matters as salary scales and dividend policy
 

§       Purchase the stock from the estate of the deceased.  The final alternative may not be practicable because the survivors may not be able to raise the cash, agreement to a fair price may not be possible, or the heirs may refuse to sell.

From the heirs' viewpoint, They face the possibility of having to dispose of the stock at a sacrifice price either to the surviving stockholders or to outsiders, neither of who would normally be inclined to offer a reasonable price. They face the threat of receiving no dividends if they decide to retain the stock.

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