A buy-sell agreement is important and essential for most businesses having more than one owner. This agreement benefits the owners by addressing potential circumstances which may justify a separation among business owners and providing some certainty and protection for both the exiting owner and the remaining owner through a pre-negotiated buyout offer.
As business law attorneys in Los Angeles, the legal team at The Hakim Law Group wants all business owners to understand the importance of having a buy-sell agreement in place prior to a trigger event.A buy-sell agreement is essential for the integrity and the financial standing of the business, as well as for the protection of the individual owners.
The Buy-Sell Agreement
This agreement is relevant to establish the value of a buyout offer to all owners prior to a trigger event. The method of valuation is negotiated in a business-like manner without the emotional impact of an existing owner. A buy-sell agreement is legally binding between the owners and establishes the valuation method to be applied to the owners’ equity.
The Trigger Events
A well-negotiated and prepared buy-sell agreement will establish the conditions precedent prior to the contractual duties being triggered. In addition to an owner separating from the business, other triggering events include the passing of an owner, a divorce, a bankruptcy or an injury or disability as well as a material breach of certain contractual or fiduciary obligation of an owner.
The trigger events given in the preceding paragraph are in no way an exhaustive list.
Types of Buy-Sell Agreements
The buy-sell agreement can be negotiated for a one-time payout or for flexibility of payment over time under certain conditions.It should consider having a non-competition provision that precludes the exiting owner to compete directly with the business of the company being sold for a negotiated duration of time. It is a good and advisable business practice for a life insurance policy to be carried for each owner to allow for transition in the event of death. A buy-sell agreement providing for redemption obligates the surviving owners to use the proceeds from the life insurance policy to purchase the shares of the deceased owner.
The Former Spouse of an Exiting Owner
California is a community property state and, often, a former spouse can succeed in obtaining an owning interest in a business. This is the main reason why a divorce is a trigger event in a buy-sell agreement, and why the agreement needs to be in place before an event of divorce.
The Benefits of a Buy-Sell Agreement
A buy-sell agreement benefits the business and the individual owners. It is always best for a buy-sell agreement to be negotiated between the owners prior to a trigger event. Hence, the negotiations are not subject to the emotions, or the behaviors associated with an adverse situation. Below is a partial list of benefits extended to a business and its owners.
- Prevents the shares of the exiting owner being sold to a competitor
- Establishes a valuation method and formula
- Resolves or prevents conflicts between the owners and their families
- Reduces estate taxes for intergenerational businesses
- Ensures that the business can continue operations without conflict
- Ensures stability for the employees
- Prevents fractional management and voting control
The interactions between business owners are not always without an emotional component; there are personal aspects that become involved. A well drafted buy-sell agreement negotiated between business partners will help ensure that the effects of an exiting owner remain at the business level.
Have Questions or Need Advice on Buy-Sell Agreements? Contact an Experienced Business Attorney in Los Angeles today.
The Hakim Law Group stands ready to help corporations, small business owners and entrepreneurs. Our team of skilled and highly reputable business lawyers have worked in top-tier international law firms and have served as general counsel to major companies. This high level of diverse legal and business experience is paramount to our boutique approach—which produces efficient, responsive and, ultimately, more effective results. For further information or to schedule an appointment with a leading business attorney in Los Angeles, please contact The Hakim Law Group at 310-993-2203 or visit www.HakimLawGroup.com to learn more.