If your business has multiple owners, you need a sound buy/sell agreement in place. A buy/sell agreement is a contractual document between the owners or shareholders that creates rules for what will happen if and when one of the co-owners die, becomes disabled, needs to transfer his or her share, or decides to leave the company. A buy/sell agreement is a business planning tool designed to avoid negative outcomes if a misfortune happens. An experienced business contract lawyer in Los Angeles can assist you with drafting a sound buy/sell agreement.Those who operate a business together will often enter into a partnership or shareholders agreement to define and detail the nature of their business relationship. A buy/sell agreement can either be incorporated into this partnership or shareholders agreement or be an altogether separate agreement.
Either way, a buy/sell agreement is usually triggered when one of following misfortunes happens:
- An involuntary or voluntary termination of employment with the business
- Loss of a professional license
- Incarceration of a business owner
- Partners no longer get along
Buy/sell agreements create a procedure for the interest of the exiting owner to be bought back by the ongoing owner(s). This is accomplished by enabling either side to oblige the purchase of the exiting partner’s interest in the business.
The agreement also determines:
- How the interest of the exiting owner should be valued. In other words, what price should the exiting owner (or his or her estate) be paid for his or her interest in the business?
- How the continuing owner(s) will fund the purchase of the exiting owner’s interest in the business.
The exiting owner’s interest in the business can be valued in a number of different ways, i.e. by negotiation, before or after the triggering event, or based on a pre-established financial formula (i.e. 2-5x business earnings + net equity). Whatever the valuation process, it should be agreed upon in advance and reevaluated routinely.
The funding mechanism in a buy/sell agreement is most often pre-purchased life insurance and/or disability insurance. If an owner dies or becomes disabled, the ongoing owner(s) receive the insurance proceeds which they then use to buy out the exiting owner’s interest in the business.
Alternative funding mechanisms for a buy/sell agreement may include:
- A Sinking Fund – Basically a pool of cash that the business sits on in order to cover possible future obligations, such as the purchase of an exiting owner’s share in the business pursuant to a buy/sell agreement.
- Borrowing – Borrowing to fund a buy/sell agreement may be possible, although the ability to borrow money may be limited due to the circumstances that triggered the buy/sell agreement and the uncertainty that it has caused.
- Issuing Shares/Equity Financing – The business may be able to finance the buy/sell by issuing and selling shares in the business once the agreement has been triggered.
Whatever the funding mechanism in a buy/sell agreement, it should allow the owners to fund the buy/sell without an immediate and substantial financial strain and ensure that money will be available to purchase the exiting owner’s share of the business and compensate them (or their estate) fairly.
Consult With an Experienced Business Contacts Lawyer in Los Angeles
For additional information on buy/sell agreements or other advantages of business succession planning, contact our highly experienced and reputable business lawyer in Los Angeles. Afshin Hakim of Hakim Law Group at (310) 993-2203 , or visit www.HakimLawGroup.com.