A buy-sell agreement, also known as a buyout agreement, is a binding agreement between co-owners of a business that governs what happens if a co-owner dies, is forced to leave, or chooses to leave the business. It may be thought of as a sort of as a prenuptial agreement between business partners/shareholders No matter how much you like your business partner’s spouse, you really don’t want him or her in the business.
Buy-sell agreements consist of several legally binding clauses in a business partnership or operating agreement. It controls the following business decisions:
- Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders)
- What events will trigger a buyout. The most common events that trigger a buyout are an owner’s death, disability, or retirement). Less common and more problematic events include a desire of one owner to exit the company or an owner getting a divorce
- What price will be paid for a partner’s or shareholder’s interest in the partnership
A buy-sell agreement can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan if the business is a corporation. Not having a shareholder agreement, which would dictate the purchase price of a departing shareholder, is very common with small businesses.
You and Your Partners Need a Plan
People often form a corporation with an online automated company or by using the services of a company they found in a newspaper ad. This can be a disaster. If you have a business and you are not the sole owner, you owe it to yourself to make a plan.
Without a plan, any shareholder who owns at least a third of the stock in a small corporation could force an involuntary dissolution pursuant to the California Corporations Code. Under such a proceeding, the remaining shareholders would be given the option to buy out the departing owner at “fair value.” Fair Value is subjective and has been the source of a lot of lawsuits. It is not “fair market value,” which is more easily determined, but it is a starting point for negotiation.
Without a plan, partners have no starting point, and that has been the source of a lot of lawsuits. We can help. If you own a small business, talk with us about marital and business planning and exit strategies.