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Protecting Your Business With A Buy-Sell Agreement
What will have happen to your business in the event of your death or disability, a divorce, a bankruptcy or a major disagreement with your fellow partners or shareholders? What happens if one of your co-owners ceases working for the company and desires to sell his or her ownership interest to an outsider who is not previously involved in the company? Do ;you wish to be able to buy back the ownership interest of departing employee/owners to keep ownership within a group of people working for the company?
Many businesses will not survive such an event because they don’t have a Buy-Sell Agreement (sometimes called a Shareholders’ Agreement.) Let’s look at a common situation: Your Company, Inc. was formed by your two friends and you ten years ago. Each of you is in charge of key parts of the business, operations, sales and business development. However, one partner unexpectedly dies. His family wants to sell his ownership interest to an unrelated party but not to you and your remaining partner. There is a huge disagreement leading to lawsuits and countersuits which wreak havoc on the finances of the company.
Taking the brief time to set up a buy-sell agreement could have avoided all such problems. A Buy-Sell agreement is an agreement between shareholders and their corporation, between partners of a partnership or between members and their limited liability company wherein they agree in advance as to what will happen in the event of a death, disability, divorce, bankruptcy, termination of employment or major falling out among the shareholders or partners. It protects not only the owner’s interest but also the family or heirs of the owner and can prevent future litigation over who gets what and at what price.
Specific benefits of a Buy-Sell Agreement include:
- Allowing the surviving owners or the Company to purchase the deceased owner’s share of the business, thus often allowing the business to continue.
- Preventing the deceased owner’s interest from falling into the hands of outsiders.
- Ensuring funding so that the surviving family is financially compensated.
- Establishing a fair market value for the business.
- Legally binding the owners.
- Determining each owner’s interest in the business.
- Making available money to implement the agreement when there is a death, for example when the purchase obligations are funded with life insurance.
- Providing a degree of certainty to the disposition of the family business.
Specific features of a Buy-Sell Agreement include:
- Guarantying the enforceability of all the transfer terms and conditions.
- Providing each owner with an available market for his or her interest in the business in the event of death, disability or other triggering event.
- Ensuring that remaining owners retain or obtain control in the event of the death of one of the owners.
- Guarding against the transfer of ownership interest to an unwanted third party; these can be used with a succession plan to ensure that ownership will transfer to certain family members.
- Determining in non-family member situations the value of an ownership interest for estate tax purposes and potentially for a divorce or bankruptcy situation.
Thus there can be orderly transfer of interests in the corporation, limited liability company or partnership. The Buy-Sell Agreement gives everyone comfort and security. If you are involved in a closely held corporation, limited liability company or partnership and would like to avoid the hassles and headaches that can arise from the failure to plan ahead through a Buy-Sell Agreement, we can assist you in setting one up.
For further information contact:
Los Angeles: Scott Sirlin
San Francisco: Mark Davis
San Diego: Richard Clampitt and Peter Olson
Houston: Joseph DiCecco
Las Vegas: Scott Cook
New York: Mercedes Colwin
The Business & Technology Group has attorneys with the expertise to handle a full range of business transactions and planning needs for the firm’s clients. See our website for more information.
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