One of the most often overlooked situations by business partners is the potential of a co-owner’s eventual separation from the business, whether it is a voluntary or involuntary departure.
These situations can be addressed in the governing documents of a business entity, or in a separate document, commonly known as a Buy-Sell Agreement. A Buy-Sell Agreement is a legally binding contract among the co-owners of a business entity that clearly defines the procedure to be taken by the entity and the business owners in the event that a co-owner has or must separate from the business. More often than not, the result is that a mandatory buy-out of the shares of the departing business owner by either the entity or the remaining owners is triggered. Some of the most common reasons for an owner’s departure from a business include death, disability, resignation, voluntary sale of ownership interests, judgment execution proceedings, bankruptcy, and divorce.
These situations can cause sudden, drastic, and undesirable changes to the ownership structure of a small business, especially when a person with no knowledge of the business, such as a surviving spouse, suddenly finds him or herself in control, but lacks the knowledge, experience, and skills to run the business. Sooner than later, many businesses in this situation fail and are forced to dissolve.
Business owners should think through these potential change of ownership events and come up with a plan for the succession of the business should they face them in the future. Some of these situations, such as death, are a certainty. A Buy-Sell Agreement can properly set forth what situations would trigger the buy-out of a departing owner’s shares, who can or must purchase such shares, as well as what price is to be paid for the shares and how such purchase price is to be funded.
If you have any questions regarding Buy-Sell Agreements, or need assistance in preparing one for your business, contact a business law attorney.