Buy-Sell Agreements Are Critical For Businesses With More Than One Owner
Businesses with more than one owner must have buy-sell agreements to protect against owner divorce problems and to simplify the Issue of an owner’s departure.
A buy-sell agreement also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies, is forced to leave or chooses to leave the business. It may be thought of as a prenuptial agreement between business partners/shareholders.
Buy–sell agreements consist of several legally binding clauses in a business partnership or operating agreement or as separate agreement; it controls the following business decisions:
- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders),
- What events will trigger a buyout (the most common events that trigger a buyout are an owner’s death, disability, or retirement. Less common and more problematic events include a desire of one owner to exit the company or an owner getting a divorce), and
- What price will be paid for a partner’s or shareholder’s interest in the partnership.
Buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan if the business is a corporation. Not having a shareholder agreement which would dictate the purchase price of a departing shareholder is very common with small businesses. People often form a corporation with an online automated company or the like or by using the services of a company they found in a newspaper ad. This can be disastrous. If you have a business and you are not the sole owner, you owe it to yourself to make a plan.
Without a plan any shareholder who owns at least a third of the stock in a small corporation could force an involuntary dissolution pursuant to the California Corporations Code. Under such a proceeding, the remaining shareholders would be given the option to buy out the departing owner at “fair value.” “Fair Value” is subjective and has been the source of a lot of lawsuits. It is not “fair market value,” which is more easily determined, but it is a starting point for negotiation.
If you fail to plan you plan to fail. Without a plan partners have no starting point. And that has been the source of a lot of lawsuits.
If you have questions regarding business planning, formation, contracts or dissolution, contact us. We have experience dealing with the legal issues which confront small business start ups and going concerns. Top Rated. 25 years of experience.