Why every business with 2 or more owners needs a buy-sell agreement
Categories: Startup Issues
A buy-sell agreement is a document that preserves continuity of business ownership when specific events occur, such as death or disability of a business owner. It is a contract between shareholders or business partners concerning the future ownership of the business and can be drafted as part of the company’s shareholder agreement or as a separate agreement.
The buy-sell agreement typically controls events triggering shareholder buyout, persons that may purchase the departing shareholder’s stock, the valuation of the departing shareholder’s stock and how the buyout will be funded.
The advantages of a buy-sell agreement are that it sets out a strike price well in advance for the departing shareholder’s stock, creates a market for the business interest (which can be extremely difficult in closely held corporations) and assures business continuity for the remaining active owners, employees, customers and creditors.
Dear Ryan:
You're so right . . . and yet that only scratches the surface of what a shareholder's agreement could and should include. People tend to focus on death and disability alone, but there are many other reasons that an owner may need (or want) to leave a business: divorce, new baby, lifestyle changes, different business opportunity, ill parent, fundamental disagreements (stalemate), bankruptcy, getting caught with your hand in the till, substance abuse, etc. And the buyout formula may differ depending on longevity with the company and the reason for departure. Plus, it's important to make absolutely clear what should happen with the company's intellectual property, confidential information, customer lists — can the departing partner use them in any way?
The number of business owners that don't have an ownership agreement, or have cobbled it together themselves . . . oh, just put a stake through my heart!
Best,
Nina
Dear Ryan:
You're so right . . . and yet that only scratches the surface of what a shareholder's agreement could and should include. People tend to focus on death and disability alone, but there are many other reasons that an owner may need (or want) to leave a business: divorce, new baby, lifestyle changes, different business opportunity, ill parent, fundamental disagreements (stalemate), bankruptcy, getting caught with your hand in the till, substance abuse, etc. And the buyout formula may differ depending on longevity with the company and the reason for departure. Plus, it's important to make absolutely clear what should happen with the company's intellectual property, confidential information, customer lists — can the departing partner use them in any way?
The number of business owners that don't have an ownership agreement, or have cobbled it together themselves . . . oh, just put a stake through my heart!
Best,
Nina
I find clients don't wish to discuss exit-strategy when starting a new business. Thus, various shareholder agreement provisions, like the buy-sell, get extremely low priority. It's hard to blame the clients, though. All the excitement about the new venture and we start using words like "death" "disability" and "divorce."
I find clients don't wish to discuss exit-strategy when starting a new business. Thus, various shareholder agreement provisions, like the buy-sell, get extremely low priority. It's hard to blame the clients, though. All the excitement about the new venture and we start using words like "death" "disability" and "divorce."
I have a question about this. We have a family business in which my father owns 99% of the stock. He gave an employee 1 share as a Christmas bonus. We later discovered she was embezzling. Our lawyer advised us to keep her in order to have her repay us in full. However, we have been informed she has been "up" to something by an associate of hers. Along the lines of her either trying to start a competing company or trying to take her client list to a competitor. My 2 questions based on this scenario are: 1)If something were to happen to my father (his shares are in the family trust and pass on to the family) what rights would this employee have or what could she do with her 1 share – should we have any concerns?
2)What rights do we have since she is a shareholder if she were to try and start a competing business with her 'insider' info and/or take the client list to a competitor?
Also, would a buy/sell agreement put into place now help us?
I have a question about this. We have a family business in which my father owns 99% of the stock. He gave an employee 1 share as a Christmas bonus. We later discovered she was embezzling. Our lawyer advised us to keep her in order to have her repay us in full. However, we have been informed she has been "up" to something by an associate of hers. Along the lines of her either trying to start a competing company or trying to take her client list to a competitor. My 2 questions based on this scenario are: 1)If something were to happen to my father (his shares are in the family trust and pass on to the family) what rights would this employee have or what could she do with her 1 share – should we have any concerns?
2)What rights do we have since she is a shareholder if she were to try and start a competing business with her 'insider' info and/or take the client list to a competitor?
Also, would a buy/sell agreement put into place now help us?
Cheryl:
Unfortunately, due to lack of information, various legal ethics rules and some other reasons, I can't render specific legal advice about your family's business situation.
You do bring up some serious issues in your comment, however. So my advice to you (more appropriately, your father) is consult the attorney as soon as possible.
The attorney will be able to devise a plan based on the current corporate documents, employment agreement (if any), fact pattern and jurisdiction.
Would a buy-sell agreement put into place now help you? It really depends what you want out of the whole situation, but if it did help, it would play a relatively minor role. There are other competitive-related issues that need to be handled. So schedule that appointment with the attorney.
Good luck.
Cheryl:
Unfortunately, due to lack of information, various legal ethics rules and some other reasons, I can't render specific legal advice about your family's business situation.
You do bring up some serious issues in your comment, however. So my advice to you (more appropriately, your father) is consult the attorney as soon as possible.
The attorney will be able to devise a plan based on the current corporate documents, employment agreement (if any), fact pattern and jurisdiction.
Would a buy-sell agreement put into place now help you? It really depends what you want out of the whole situation, but if it did help, it would play a relatively minor role. There are other competitive-related issues that need to be handled. So schedule that appointment with the attorney.
Good luck.