Buy/Sell Agreement Attorney in El Cajon and San Diego County
When a business has more than one owner, each owner/partner takes on some risk in exchange for the potential benefit of partnering together. And while everyone is usually optimistic in the beginning, you never really know how things are going to turn out. Many things can go wrong during the course of business operations, and this is why it is very important to address worst-case scenarios ahead of time.
One of the most essential documents that a multiple owner business should have in place is a comprehensive buy/sell agreement. This agreement spells out, in advance, the terms and conditions by which an owner can sell his/her interest in the business. Without such an agreement, a business exposes itself to ownership disputes that can be very costly and even threaten the survival of the company.
Buy/sell agreements are complex documents that should be tailored to the specific needs of each business. Although there are “boilerplate” templates you can find in various places online, these documents will do nothing to address your unique circumstances, and therefore, they will most likely fall well short of providing the protection your business needs. With so much at stake, it is best to have this type of document prepared by an experienced business attorney and with the in-depth input of all stakeholders.
For over 20 years, Garmo and Garmo, LLP has provided strong legal guidance and representation for all types of businesses in San Diego and throughout Southern California. Our lawyers have in-depth knowledge of business law, and over the years, we have seen just about every issue and dispute that can come up internally between business partners, and between businesses and outside parties.
We work closely with our clients, and we take the time to learn and understand each specific business, so we can better address their needs. When it comes to buy/sell agreements, we ask detailed questions of the owners to uncover every potential scenario that should be listed in the document. We will also bring up issues that you may not have thought of (based on our experience and what we have seen with other businesses) to help ensure that all important areas are covered.
What is a Buy/Sell Agreement?
A buy/sell agreement (also referred to as a buyout agreement) is not to be confused with a purchase agreement. This type of document is not appropriate for the buying or selling of a business to another party. Buy/sell agreements are binding contracts between the owners of a business, and they set out the terms and conditions under which an owner can sell their interest; such as who is allowed to buy the interest of the owner that is selling, what price will be paid (or how the purchase price will be determined), and how the buyout will be funded. Essentially, buy/sell agreements govern buyouts of owners between themselves, and the details of these types of transactions. Many experts liken them to prenuptial agreements for business co-owners.
What Can be Covered in a Buy/Sell Agreement?
A well-drafted buy/sell agreement should cover a wide range of triggering events, such as:
- Retirement: With the passage of time, there is a good chance that one or more of the owners will want to retire. If/when that happens, the agreement could stipulate that the remaining owners could buy out the retiring owner’s shares at a fair price. The agreement should also spell out what “retirement” looks like. For example, what if an owner wants to stop being involved in the business on a full-time basis, but wants to continue in a consulting role? Would this still count as retirement? These and similar questions should be answered.
- Conflicts among Owners: One of the most common reasons for exercising a buyout option is an irreconcilable dispute among the owners. Most disputes can be resolved through discussion, negotiation, or in some cases, mediation. But when a conflict escalates to the point where one of the owners no longer wants to stay with the business, there should be conditions in place under which this owner can be bought out. Otherwise, this could turn into a costly legal battle.
- Voluntary Departure: Sometimes, an owner’s departure is not triggered by retirement or a major dispute, they just want to leave to pursue other opportunities or for other reasons.
- Criminal Conviction: What if an owner becomes involved in criminal activity? Maybe it starts out as an investigation that turns into an indictment and eventually a criminal conviction. If one of the owners is convicted of a crime, this could threaten the integrity of the business, and drastic action may have to be taken to preserve it. In this type of scenario, one of the cleanest solutions is to buy out the convicted owner.
- Divorce: If one of the owners gets divorced, their ex-spouse may end up becoming a co-owner. This is more likely in a community property state like California, where all assets are considered to be equally owned by both spouses. A buy/sell agreement can give the other owners the right to buy out the interest owned by the ex-spouse.
- Bankruptcy: Many people go through financial struggles during their lives for various reasons. And sometimes, it reaches the point where the only way to get back on their feet financially is to file for bankruptcy. But for the co-owner of a business, bankruptcy is a very serious matter. If an owner goes into bankruptcy without selling their interest in the business, the bankruptcy court may allow creditors to pursue their shares in order to satisfy the outstanding debts. A buy/sell agreement should require co-owners to inform other owners before filing for bankruptcy, so that a buyout can be completed first.
- Death or Incapacitation: No one ever likes to contemplate this scenario, but it cannot be ignored. At some point, a co-owner might pass away or experience a health issue that renders them incapacitated. Without a buyout agreement, this owner’s interest would be owned and/or controlled by their spouse or other family members. And this would be far from ideal if these individuals have no connection with more interest in the business.
When crafting a buy/sell agreement, there are some important issues that need to be addressed. These include:
Business Valuation: The agreement should govern how the interest in a business will be valued. This could be done using one or more of the most common valuation methods; such as asset value, a multiple of earnings, or market value. The valuation method used should be determined by the unique characteristics of the business.
Financing: A major issue when it comes to a buyout being triggered is how to finance it. For the death and disability of an owner, insurance policies can be purchased ahead of time to fund the buyout. But what about other scenarios? What if the other owners cannot come up with a 100% lump sum cash payment to buy out an owner’s interest? The buy/sell agreement can include flexible financing terms to address this issue, such as a percentage of the purchase being in the form of a down payment and the rest paid in installments over several years at a reasonable interest rate.
Tax Implications: Every business sale or buyout transaction has tax consequences. And without careful planning, an unreasonably large portion of the proceeds from the sale may wind up in the hands of the government. Buy/sell agreements should be structured in a way that minimizes tax liability and allows those involved to keep the lion’s share of their hard-earned money.
In putting together a comprehensive buy/sell agreement, your lawyer will work hand-in-hand with other reputable professionals, such as CPAs and business valuation specialists.
Contact a Seasoned San Diego Business Attorney
Like other business contracts, careful thought must be put into the wording of a buy/sell agreement so the language is precise and the agreement accomplishes the objectives of the parties involved. At Garmo and Garmo, LLP, we will work closely with you to help ensure that your interests are protected, and that all known eventualities are fully accounted for. Call our office today at 619-441-2500 or message us through our online contact form to schedule a consultation wit