If you own a San Diego business with more than one owner, do you know what will happen to the business if one of your business partners wants to sell his or her share, or decides that it’s time to retire – should anyone be allowed to take that co-owner’s place? What if instead a co-owner divorces, becomes disabled, or dies – will that business partner’s spouse or other family members suddenly become new owners, and how can that affect the business? A buy-sell agreement (also called a buyout agreement) answers these and other important questions by detailing how ownership will be restructured once certain events occur. For each business partner, the potential benefits of creating a buy-sell agreement are seen from two perspectives: if your partner leaves, the buyout agreement can promote business continuity and protection for you during this transition; on the other hand, if you decide to leave, the agreement can plan for your own exit or retirement, and can help protect your family in the event of death or disability.
To the extent possible, you’ll need a buy-sell agreement that’s comprehensive and covers many different scenarios in anticipation of what could happen in your business. The purchase of the departing owner’s share may be made by individual co-owners or the business entity itself, and the best purchase structure often depends on the size of your company. You may also be asking about where the money will come from to buyout a co-owners share. In this respect, small business owner John Ingrisano highlights the value of a buy-sell agreement in his blog on TheFreestyleEntrepreneur.com, since in certain situations a buy-sell agreement can ensure that there’s cash available for a buyout when the time comes. We’ll advise you on the different options for funding a future purchase, but for many businesses, a cost-effective solution is to purchase life or disability insurance to fund the buyout when triggered by these events. Your agreement also must address whether the owners or the business itself must pay the insurance premiums. Here are just a few other considerations surrounding the events that often trigger the purchase of a co-owner’s interest:
- If a business partner wants to sell, you’ll need to decide whether his or her interest must be offered first to the other co-owners, or whether the other owners will be required to buy back the departing owner’s share. The agreement should also cover whether any non-compete restrictions should be placed on the departing owner, to the extent allowed by California law.
- If retiring, the agreement will set the conditions for retirement that will qualify for a buyout, and you’ll also decide on payment arrangements. For example, a percentage of the buyout price might be paid in installments with interest, but you’ll want to take the business’s potential for future profitability into consideration.
- Upon death or a disability as defined by the agreement, decide whether the buy-sell provisions will require the remaining owners to purchase the other owner’s share, and how the owner or the owner’s heirs will be paid.
- If a business associate is faced with bankruptcy, a buy-sell agreement can require that partner to notify co-owners before filing, giving the others the opportunity to buy his or her interest. This can help prevent the loss of company assets, since the money paid to the departing owner will be subject to the bankruptcy, instead of the business’s assets.
- Divorce also has the potential of bringing third parties into the picture, but the buy-sell agreement can require that the business interest be sold back to the other co-owners or the business entity.
As you decide on the terms of your agreement, we’ll explain your options and the possible benefits and drawbacks, and go over other triggering events that may be appropriate to include in a buy-sell agreement for your business (such as provisions in the event of an acquisition or an employment termination). Besides identifying which events will prompt a mandatory or optional buyout, a buy-sell agreement also resolves crucial valuation questions. By determining now how you’ll calculate the business’s worth and the value of your respective interests, you’ll minimize uncertainty and help prevent conflict later. Values can vary greatly depending on the valuation method used, but by agreeing to a formula ahead of time it’s much more likely that you’ll be able to fix a fair price. Many times it can also help reduce estate taxes upon death, although you must tread the law carefully in doing so.
To be effective, a buy-sell agreement must be carefully thought out and comprehensive. With years of experience, we’ll evaluate the legal and business considerations and strategize to help protect your mutual interests and that of your family through a buyout agreement or other retirement or business succession plans. Take a close look at your business and guard against future uncertainties by contacting San Diego Law Firm’s experienced business attorneys at (619) 794-0243.
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