Understanding Buy-Sell Agreements
July 10, 2023
If you're a business owner, you are probably already acutely aware of how important it is to plan for the future. But have you ever considered what would happen to your company if you retired or passed away unexpectedly?
That's where buy-sell agreements come in. These contracts stipulate what happens if one of the owners were to exit the business.
If you don't yet have a buy-sell agreement in place, you're not alone. In fact, only 46% of businesses have a buy-sell agreement, according to a study from the Exit Planning Institute.
That's where we come in. At the Law Offices of Jerry J Goldstein, we specialize in creating and reviewing buy-sell agreements for businesses throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.
Here's what you need to know.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a legal contract between business owners that outlines the terms and conditions of the transfer of a business ownership interest.
Simply put, it is a plan for what happens to a business in the event of an unexpected change in ownership and to avoid business litigation (a business lawsuit). The agreement usually includes a valuation of the business, the circumstances under which an owner’s interest will be sold (such as death or disability), and the sale price or mechanisms for determining the sale price.
There are several different types of buy-sell agreements that can be tailored to fit the unique needs of your business.
Some common types include cross-purchase agreements, where co-owners purchase each other's shares in the business, and entity-purchase agreements, where the business itself purchases the departing owner's shares. Another option is a hybrid agreement that combines elements of both.
A buy-sell agreement ensures that business interests are transferred smoothly and with minimal disruption in the event of an unexpected change in ownership.
Without a buy-sell agreement in place, disputes between remaining partners and heirs of a deceased or departing owner can escalate, leading to legal battles and potential damage to both the business and personal relationships.
It can also ensure that the remaining partners have the financial resources to purchase the ownership interest without having to resort to outside financing options, which may affect the business and its profitability.
Disputes When a Buy-Sell Agreement Doesn’t Exist
Without a buy-sell agreement in place, the families of the departed may run into conflicts and disputes over the business's assets. Here are some common issues that occur when a buy-sell agreement is nonexistent in certain scenarios (including shareholder death/divorce/incapacitation).
If a shareholder dies without a buy-sell agreement in place, the remaining owners and the deceased's family may have competing interests. The family may want to sell the deceased's shares to someone else, while the remaining owners may want to keep the ownership in-house.
Without a clear plan detailing how to handle this situation, disputes are likely to arise.
In case of a divorce, things may get complicated and even messy, especially if both spouses were also co-owners of the business. Without a buy-sell agreement, the divorcing parties may find it hard to determine the business's value, how the assets should be divided, and who should maintain control of the business.
Having no clear guidance may lead to disagreements, which can end up affecting the success and profitability of the business.
Shareholder Becomes Incapacitated
If a shareholder becomes incapacitated, the remaining owners may face difficulties making decisions that require the signature of the incapacitated person. In the absence of a power of attorney, the business may come to a standstill, and the remaining owners may find it hard to maintain the business's operations.
Possible Buy-Sell Agreement Disputes
First and foremost, it's essential to have a well-crafted buy-sell agreement in place to avoid a commercial lawsuit down the road. However, even if you have an agreement in place, a buy-sell dispute can still occur.
One common dispute is when one owner wants to sell their shares, and the other owners don't agree on the price. This is where having a clear agreement that outlines pricing formulas comes in handy. If your agreement doesn't have a clear pricing formula, it's essential to negotiate the price in good faith.
Another common buy-sell agreement issue is when one owner wants to sell their shares, but the remaining owners can't afford to buy them out. In this case, it's essential to have a financing plan in place that outlines how the remaining owners will pay for the shares. Without a financing plan, your business could face bankruptcy.
Know Your Legal Rights
If you're facing a buy-sell agreement dispute, it's essential to know your legal rights and consult with a business attorney who has experience in commercial litigation.
At the Law Offices of Jerry J Goldstein, we can help you navigate these complex legal issues. Our firm serves clients throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.
Please note that in providing services outside of our immediate area, we generally don't bill for travel time from our offices to meet at the business location or home of our clients.
No matter where you live or what kind of issue you're dealing with, we've got you covered. Don't hesitate to reach out to us for a consultation.