Buy-Sell Agreements for Companies
If you have a business with multiple owners, you need a separate buy-sell agreement (partnership buyout agreement). It will explain how and when owners are able to sell their interest. Typically this agreement should be drafted by your attorney and signed before the company starts, but if you failed to do so, consider doing it now. If you do not discuss “buy-sell” matters before a partner wants to leave, co-owners could end up suing each other due to a lack of clarity in how the process should proceed. Do it now because drafting it later is extremely difficult to negotiate.
Triggers: Your company’s buy-sell should identify different triggers that will activate the agreement. For instance, if an owner decides to retire, he could be forced to sell. Or if an owner gets a divorce or in any way declares for protection under the bankruptcy code, the agreement would spell out ways to protect the business from the spouse. Or if an owner dies, the company could force a sale to existing owners. Typically, the buy-sell agreement will require the company to purchase life insurance, to enable the purchase of shares from a deceased member.
What if one partner doesn’t want to sell the business? The agreement should have a clause which explains that if the majority of owners decides to sell the company, they can force the sale of all minority owners. Minority owners should receive the same pro-rata price as majority owners in a sale. This particular clause is important to investors looking to purchase a company because it discusses the method by which is is accomplished.
What price should my business sell for? Usually a buy-sell agreement contains a provision stating that one partner can offer to buy out the other at any price. The other partner will be forced to either accept the offer or purchase the company for the same price. Obviously the owner with more to offer has an advantage, but the less wealthy owner can ask that the attorney draft the buy-sell agreement to allow funding over time, even by with profits from continuing business.
Right of First Refusal. Your buy-sell agreement should require a right of first refusal to avoid third-party buy-ins. This clause states that if a partner finds an outside buyer, he must make his first offer to the existing owners.
These agreements are critical and professional help from an attorney is necessary.
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Your situation is unique. Do not rely exclusively on the above information; it is necessary that you speak with a licensed California lawyer about your particular matter. For more information or to schedule a free confidential consultation with a San Diego business attorney, call (619) 800-0676 or fill out the contact page of this website.