One recurring question I get from my business owner clients is regarding how to maintain ownership of their business entity in the event another owner disposes of his interest in the entity, whether it be a voluntary or involuntary disposition. In the context of a corporation, this issue is typically dealt within a buy-sell agreement between the shareholders; in the context of a limited liability company, buy-sell provisions are usually drafted into the operating agreement. Any business that has multiple owners should always deal with this issue, in writing, before potential problems and arguments arise. Most business people and lawyers will agree that dealing with these sorts of potential conflicts up front is the secret to long term harmonious relationships among business owners.
There are many many different ways a buy-sell agreement can manifest itself. Below I have listed a number of questions that business owners should consider when planning for a buy-sell agreement.
- Should the mechanism to maintain ownership be redemption by the business entity or purchase by the other owners?
- Should the buyer of the interest be required to buy the transferring owner’s interest? Or should the buyer merely have the option to do so?
- Should the non-transferring owners have a right of first refusal?
- What happens upon the death of an owner? What about the permanent disability of an owner?
- What happens if an owner divorces or declares bankruptcy?
- What happens if an owner wants to sell his interest to a third party?
- How is the price determined?
- How is the price paid? Cash? Note?
- Should the owners be required to maintain life insurance policies to fund the purchase?
These are just some of the issues business owners should explore when considering a buy-sell arrangement with other each other. Of course, I recommend you retain knowledgeable and experienced legal counsel to help you through the process and to make sure your provisions are properly prepared.