Corporate Law Blog

"The Only Thing that is Constant is Change" - The Need for a Buy-Sell Agreement

You started a business with your lifelong friend, family member or business acquaintance and everything is going great. The business is doing well and the owners see eye-to-eye on every major decision. But things will not run smoothly forever. Every business faces difficulties now and then. Some risks are foreseeable and the owners will put appropriate plans in place to deal with them. Other problems are more difficult to see, especially in the early stages of the company when the future looks bright and the owners are eager to work toward a common goal. What happens to the ownership interests of an owner upon his death? What rights do the company and the other owners have when an owner decides to sell her ownership interest to somebody none of the other owner know? What if the owners are equally split on a material decision and the disagreement cannot be resolved? Situations like these are inevitable and are the reason it is imperative that every business have a buy-sell agreement.

A buy-sell agreement is a legally binding contract between co-owners that governs the parties upon the occurrence of certain circumstances and, where the transfer of ownership rights is involved, defines the conditions of the transfer, frequently including purchase price. The buy-sell agreement can be structured to allow the remaining owners to protect themselves from disruption of operations, disfavored business partners, and even entity dissolution in certain situations. For example, upon the death of one owner of a small business, the three remaining owners may learn that the deceased's ownership interest has become property of the estate of the deceased, subject to a lengthy probate process and eventually transfer to someone the owners have no desire to do business with, such as the deceased's widow and children. A buy-sell agreement may address this situation by allowing the company to purchase the deceased's ownership interest upon his death such that unintended consequences are avoided and the deceased's estate and beneficiaries receive the value of the ownership interest instead of actual ownership in the company.

The circumstances covered in a buy-sell agreement are determined by the owners, but possible events may include:

· Death

· Disability

· Divorce

· Retirement

· Deadlock in a management decision

· Loss of a professional license

· Criminal conviction

Owners may decide their buy-sell agreement should also address funding for optional or required purchases. Possibilities include life insurance on each of the owners to fund purchases upon the death of an owner and provisions for deferred payment of some or all of the purchase price.

Planning for events that seem remote is sometimes difficult, particularly in the initial stages of a business when enthusiasm is high and the possibility of intractable disagreement between owners is almost impossible to imagine. But things change, and when they do, it's certainly better to have a plan in place.

If you are interested in drafting a buy-sell agreement for your business, or need to update an existing one, contact the corporate attorneys at McBrayer today.

This article does not constitute legal advice.