Articles Cristi Michelon Vasquez Santa Barbara Attorney

Buy/Sell Agreements

By Cristi Michelon Vasquez on Sep 14, 2018 at 02:00 AM in Entity Formations

Does The Thought Of Being In Business With Your Partner's Spouse Frighten You?

How about their parents or children? Are you adequately protected from that reality?

Set up your Buy/Sell Agreement Now

To Ensure This Doesn’t Happen To You!

You have entered into a business relationship with your partner, fellow shareholder or member of your company and you have been running a successful business for quite some time. You and your fellow owner(s) have a great relationship, everyone works well together. There is a great division of the workload and teamwork provides peak performance for the productivity of your business. But have you ever thought about who you would be in business with if your partner, or co-owner of your business were to die or divorce? That is right; you might be forced to be in business with their family. If you are currently in business with a married person, you would likely be in business with their spouse. If you are currently in business with an unmarried person, you would likely be in business with their children, parents, or siblings. At first glance, this may not seem so bad. After all, you know them and they are great people, but how would they really be to work with? How would you get along in a business relationship? Do they know anything about your business? Could they step up and fill your co-owners shoes?

A Buy/Sell Agreement is an agreement between the owners of a business that provides for these questions to be answered. How? A Buy/Sell Agreement is simply a contract that provides for the sale of a business interest for a specified price, at a future date, upon the happening of a future event. The Buy/Sell Agreement can also provide the liquidity necessary to finance the purchase of the sale of the business interest from the family of the deceased owner of the company.

Buy/Sell Agreements are generally established and funded when the owners of a business are alive and well. Funding is most often accomplished through the use of life insurance policies that are either owned by the individual owners of the company or by the company itself. The key to properly and adequately fund the Buy/Sell Agreement is to provide enough funding to effect a transfer of ownership interest in the company that the parties desire and avoid the transfer of an ownership interest in the company to an undesired third party simply because of lack of funding. Lack of funding in these circumstances can also result in the dissolution of a company.

In addition to death, Buy/Sell Agreements can also be utilized in the event of a divorce. If you are entering into a business relationship, whether it is a partnership, corporation, or LLC with a person that is married, you may want to ensure that you are not forced to be in business with their spouse should their marriage dissolve. These agreements are utilized in this manner by providing that should any relative by marriage of the founder of the business be divorced from a blood relative of the founder, any shares owned by them or acquired by them in the divorce must be offered for sale to a buyer for a set price. The Buy/Sell Agreement will often determine the method for valuing or appraising the business to determine that price at the time of the buy-out.

When forming a company with a co-owner, entry into a Buy/Sell Agreement can be made a mandatory requirement of the formation of your business. Creating a Buy/Sell Agreement provides a level of protection for all owners of a business. Establishment of a Buy/Sell Agreement early on in a business relationship can help avoid conflict – negotiate early before you are a multi-million dollar company. Early negotiations ensure consistency throughout the business and avoid conflict. However, as your company grows and circumstances change, your agreement should be periodically reviewed to ensure that it continues to meet your needs.