With any business that has multiple owners, there is always a chance that one of the owners will leave someday, either by choice or necessity. Sometimes, this scenario results from heated disputes between the owners, while at other times, circumstances might make it necessary for a change in ownership. To adequately prepare for these scenarios, it is best for a business with more than one owner to create a buy-sell agreement from the start.
What is a Buy-Sell Agreement?
Also known as a “buyout agreement”, a buy-sell agreement is a contract between the owners spelling out the terms and conditions by which an owner is allowed to sell his/her interest in the business. This type of agreement can address various aspects of a business ownership sale, such as:
- Whether or not a departing owner must be bought out;
- Who is allowed to buy the shares of a departing owner;
- The price that will be paid, or the method that will be used to value the interests, of an owner that is selling;
- Other terms and conditions of a future sale;
- What specific circumstances will trigger an ownership buyout.
Events that can be Covered in a Buy-Sell Agreement
There are numerous events that can be spelled out in the contract that could trigger the terms and conditions of a buy-sell agreement:
An Owner’s Desire to Sell His or Her Interests Because of a Dispute
As mentioned earlier, there are times when business owners do not see eye to eye. And after all attempts to resolve their disagreements have been exhausted, a new owner may feel they have no choice but to leave the company. When this situation occurs, the other owners may want to have the right of first refusal, giving them the option to buy out the departing owner’s interests before this owner can entertain offers from outside parties.
An Attractive Offer from an Outside Party
There are instances when one of the owners is approached by someone from the outside who wants to buy their interest in the business. Similarly to the previous scenario, the other owners may want the first right to buy the interests of an owner who wants to sell. At the very least, the parties to the agreement will probably want some type of vetting process in place for which they can screen potential new owners and approve or deny their right to buy into the company.
A Divorce Settlement
Divorces that involve business owners can get messy. This is especially true in California, because we are a community property state. This means that all property and earnings that were acquired during the marriage are considered to be equally owned by both spouses. So, if one of the owners gets a divorce, there is a good chance that the ex-spouse will become a part owner of the company. Understandably, this may not be acceptable to the other owners. With a strong buy-sell agreement in place, you can avoid this scenario by requiring the ex-spouse to sell their newly acquired interest in the business back to the current owners.
An Owner having Personal Financial Trouble
If one of the owners is struggling financially and facing bankruptcy, this could threaten the future of the business. In some cases, the bankruptcy trustee might even order the sale of the business to help satisfy a part owner’s outstanding personal debts. A buy-sell agreement can state that, before any owner files for bankruptcy, they must notify the other owners, and such a notification could also constitute an automatic offer to buy out the financially troubled owner. This protects the business from getting caught up in a messy bankruptcy proceeding.
An Owner’s Retirement
Most business owners plan to retire someday. But retirement time is not likely to be the same for each business partner. When the time comes for one of the owners to retire, it is in everyone’s best interest to ensure a smooth transition. With a buy-sell agreement, the other owners could be given the right to purchase to retiring owner’s interests at a specified valuation and perhaps with terms and conditions such as a small down payment and a payment plan.
The Death or Disability of an Owner
Life happens, and unexpected events can happen to any one of us. Two very unfortunate circumstances that should be addressed in a buy-sell agreement are an owner’s death or their long-term disability. Losing a key member of a business can sometimes be death blow, but with proper planning, this does not have to be the case. Buy-sell agreements are often combined with insurance policies that can provide the other owners with the funds to buy the shares of one of the owners in the event of a worst-case scenario.
Work with a Seasoned San Diego Business Lawyer
Any California business that has more than one owner should have a buy-sell agreement in place to help protect the business when adverse circumstances arise between the owners. And because each business is unique, the language within these agreements needs to be very precise and tailored to the business’s specific needs.
If your business is located in San Diego or anywhere in Southern California, call Garmo and Garmo, LLP for strong legal guidance. We can work with you to craft a buyout agreement that effectively addresses all known eventualities. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.