Business Prenups; Buy/Sell Agreements
Sacramento Business Attorney Buy-Sell Agreements
A business partnership is analogous to a relationship. Initially there is a courtship where two people get to know one another. Maybe a business plan is created during this stage of the relationship or maybe just the concept of a business. As the relationship progresses and it becomes more serious, one person may pop the question: Will you be my partner? This is a huge commitment for both individuals and a tough conversation. How much equity? How will we pay personal bills? What is the time commitment? What are the roles? There are dozens of items that need to be covered. Answering all of the important questions before moving forward with the partnership is incredibly important because it will reduce the potential for misunderstandings between the partners. Another tough question that needs to be addressed is the potential separation of the partnership. A buy-sell agreement, similar to a prenuptial agreement to marriage, governs situations where a business owner dies, files bankruptcy, becomes disabled, retires, or otherwise leaves the business.
No one wants to think about divorce or ending a business partnership. However, putting everything in writing while the parties are friendly is essential. It will create a roadmap for resolving common issues and will ultimately reduce the chances of a dispute.
What will happen in the event of death or disability of a business partner?
A buy-sell agreement may require the business to purchase insurance on both business partners. Thus, in the event of death or disability, the life insurance or disability insurance policy would provide the necessary funding for the business to buy out that partner’s interest. Without an effective buy-sell agreement, a deceased business partner’s interest would pass with his or her estate. This could result in a lengthy legal process for the surviving business partner.
What will happen when one business partner decides to voluntarily leave the business?
An effective buy-sell agreement details the procedures for valuing the business partner’s interests. There are dozens of methods to valuing a business and each industry is different. Its critical to create a method to value the business before any issues arise between the owners. The buy-sell agreement might also detail how payment should be issued; i.e., lump sum, payment plan, interest rate, and time frame for payment(s).
A buy-sell agreement may also include a right of first refusal. If a business partner decides to voluntarily leave the business, can he or she sell their interest to a third-party?
What are some other purposes of a buy-sell agreement?
- Right of First Refusal. This clause provides current shareholders with the option, and procedure, to buy back the shares of another shareholder who desires to sell;
- Come-Along, Bring-Along, Drag-Along Clauses. These clauses will essentially force minority shareholders to participate in the sale of shares. Generally this occurs when the company is seeking venture capital. These clauses make the company more marketable and provide for necessary exit-strategies;
- Required Percentages. This clause will determine the required percentage of votes to issue additional shares;
- Dispute Resolution. These clauses establish rules allowing for dispute resolution;
- Governing Choice of Law. This indicates what laws will govern your buy-sell agreements;
- Shareholder Death/Termination. These clauses can require that upon the death of a shareholder or termination of an employee, his or her shares will be repurchased by the company;
- Divorce or Bankruptcy. Provides methods to avoid disruption of business operations by establishing procedures that require the sale of ownership interests;
- Future Share Prices. A corporation can use this clause to provide a “formula” for determining the purchase price of future shares, including current market conditions;
- Funding Sources. Provides a more liquid funding source, like insurance policies; and,
- Valuation. A buy-sell agreement can include provisions that pre-determine a process for valuing a business partner’s interest.
Sacramento Business Attorney
Trevor Carson is an energetic business attorney. In 2015, he was named by Sacramento Magazine as a top lawyer in Sacramento and was named a Rising Star by Super Lawyers Magazine. Business attorney Trevor Carson focuses on consistency, clarity, precision, and simplicity. Please contact our Sacramento business attorney if you have any questions or want to learn more about the purposes of having a buy-sell agreement.
By: Trevor Carson Google+
*There are many purposes to a buy-sell agreement; however, this article is only briefly listing a few. The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary. This blog article may contain language which could be read as a testimonial or endorsement. That testimonial or endorsement does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter. This blog articles is an Advertisement and or Newsletter. Sacramento’s business attorney Trevor Carson discusses Buy-Sell Agreements.
Sacramento Business Resources
The California Secretary of State is located at 1500 11th Street, Sacramento California 95814. The California Secretary of State is a government entity where various corporate documents are filed including the Articles of Incorporation and Statement of Information.
The Department of Business Oversight is located at 1515 K Street Suite 200 Sacramento California 95814. The Department of Business Oversight is where business file limited offering exemption notices pursuant to Corporations Code Section 25102(f).