Buy Sell Agreements

POINTS TO CONSIDER:

Every business with multiple owners should have a buy-sell agreement.  It provides a plan for separating the owners if an irreconcilable dispute arises between them.   It provides how and when an owner can sell his ownership interest (whether it be represented by shares of common stock, membership interests, partnership interests or other measure), who can buy his ownership interest, at what price the ownership interest will sell, and how the purchase price is to be paid.  The buy-sell agreement should provide a formula for valuing shares or interest to ensure a fair price for a departing owner.  It is best to sign a buy-sell agreement before the business is started, but if you failed to do so, it is not too late.  Without a buy-sell, angry partners usually end up in costly litigation and the decisions are left to a judge or jury that knows nothing about your business.

The buy-sell agreement should specify the events that will set the agreement in motion.  The agreement should set forth what happens if and when:  i) an owner retires; ii) an owner gets divorced; iii) an owner declares bankruptcy; and iv) an owner dies.  Do you want to be partners with your partner’s spouse, or a court somewhere?    It is also advisable to take out life insurance on each partner, so it can purchase the shares of a deceased partner if necessary; thereby providing for the succession of the business and the needs of a surviving spouse of a partner.

A typical clause in a buy-sell provides that one partner can offer to buy out the other at a price he chooses. The other must either accept the sale or buy the company for the same price.  This is favorable to the partner with the money, but not the other.  The other partner may want to try to stipulate that the buyout can be funded over time or with profits from the ongoing business.
The buy-sell agreement should require a right of first refusal.  That means if a partner finds an outside buyer for his shares, he must first offer those shares to the existing owners, who must match the outside buyer’s price. This shields the remaining partners from suddenly running the company with a dubious new owner.
If you need help deciding whether a Buy-Sell Agreement is right for you, or what provisions should be included under your particular circumstances, please call us at 469-241-9355, or email us at info@hillperez.com.

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