Does a Buy Sell Agreement Make Sense?

If you are one of several owners in a corporation or in a limited liability company, one good idea is to use a buy sell agreement.  A buy sell agreement will allow your interest to be bought out by other owners in the business in the event that you die or are incapacitated or retire.  Many times in a closely held business, it is difficult to sell the shares of one of the owners absent selling it to the other owners.  It is also difficult to determine what the value of such shares is, especially if you are no longer here to help determine what the value is.

Most of the time, buy sell provisions are incorporated into a shareholder agreement (in the case of a corporation) or an operating agreement (in the case of a limited liability company).  There are other provisions concerning the management of the company in these agreements, such as who has the power to make decisions within the company and if certain matters require a unanimous vote of the owners to do.  For instance, if one owner wanted to take on debt within the company in order to expand and that debt is substantial, do all the owners need to agree?  If the company requires additional capital, are the owners all required to add to their capital?  Who has the power to hire and fire?  Does this power extend to the owners of the business, too?  Who has the power to make the day to day decisions?

The buy sell provisions are also tailored to the particular business.  For instance, most businesses need to have a provision to cover the event that the owners are in total disagreement and are deadlocked.  The provision may state that the parties must liquidate the entire business or it may provide for using a game of chance to determine what price that person is willing to pay the other or alternatively, is willing to accept as a purchase price for his shares.

If one of the owners retires, there should be a formula for the other owner to buy out his or her interest.  If the other owner fails to buy out the retiring owner, then the retiring owner should have the right to seek out other buyers for his shares.  The same may be true in the event that one of the owners is disabled and not able to work in the business.  In that event, the other owner should buy out his interest.

If an owner dies, it is important to have the remaining owner buy out the interest of the deceased owner based upon an agreed upon price.  In that event, most businesses will use an insurance policy to help to fund the purchase of the interest of the deceased owner.

In summary, the shareholder agreement or operating agreement can create a roadmap for the company on a day to day basis, as well as at specific points of time where an owner retires, dies or otherwise severs his relationship with the company.  It provides for a means of having owners who are deadlocked to continue the business.  Don’t have a partner in your business without one!