Preparing for the Worst: Buy/Sell Agreements 101 - Romano Law

Preparing for the Worst: Buy/Sell Agreements 101

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Preparing for the Worst: Buy/Sell Agreements 101

Life is unexpected.  Sometimes terrible things happen that will catch you off guard.  Don’t let that be the case for your business.  Have a plan in place for unfortunate possibilities. A buy/sell agreement between you and your business partner can dictate what should happen to certain aspects of your company if worse comes to worst..

When considering options for this arrangement, there are a few things to keep in mind.  Primarily, you want to know what to do if someone can no longer work with you in your business.  You also want to think about how to prevent portions of your business from being given or sold to someone you don’t necessarily want to be in business with.  These scenarios often come up when you’re dealing with death, disability, divorce, or bankruptcy.

For those situations, keep consider these options for your business:

In the case of a death…

  • Without a buy/sell provision, the ownership interest of the deceased business partner will pass to his or her estate, whether or not they have a will, meaning you’re stuck with whoever inherits the rights.
  • This provision can, but will not necessarily, force a sale of an owner’s shares upon their death.
  • It can also set a fixed price, or provide an easy formula for determining that price, so you don’t need to negotiate during a time of grief.
  • Some options:
  • Do nothing: the shares will pass on to the family. They can essentially step into the shoes of the deceased owner, and will often inherit all of their rights and responsibilities.
  • Option to purchase: the remaining business partner can opt to purchase the shares of the deceased member.
  • Forced sale: the remaining business partner is obligated to purchase (and the estate is obligated to sell) the deceased owner’s shares.  This is often accomplished by taking out a “key man policy” – a life insurance policy that will fund the purchase transaction if owner of the business passes away.

If someone becomes disabled…

  • In this sense, disability doesn’t need to be permanent.  The buy/sell provision will define how long a person must be unable to work in order to qualify as disabled.
  • The length of time often ranges from 90 days to 6 months in a single calendar year.
  • Some options:
  • Do nothing: unless the person has become so disabled that they are legally in the care of someone else, their membership interest will likely not transfer. If the person can overcome the disability, they can simply come back to the business.  If they do not, you may be in a situation with a business partner who is completely unable to assist in running the company.  However, if that partner is still well enough to negotiate terms, you can always do a normal purchase between yourselves.
  • Option to purchase: like above, the remaining business partner will have the option to purchase the disabled owner’s shares.
  • Forced sale: a disability will trigger a sale of the disabled owner’s interest in the company.  While doing this through an insurance policy is less common, it is possible.

In the event of a divorce or bankruptcy…

  • The risk in a divorce or bankruptcy situation is that an owner’s interest in the company will be given away or divided up with someone else, either a spouse or a creditor.
  • Aside from having a new business partner you may not have been planning on, it may lead to personal conflicts in the business, especially if the divorce was on bad terms.
  • Some options:
  • The most common arrangement is to say that any owner who obtains their portion of the company through a divorce or bankruptcy proceeding must immediately sell their interest to the other owners.
  • You could also force an owner to sell their interests if they get a divorce or go through bankruptcy, but this is less common and sometimes not necessary.

This is by no means an exhaustive list of what provisions you can have in your agreements, or the ways to protect your business should the worst happen. These agreements are highly customizable and can be tailored to fit your needs.

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This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.

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