As attorneys, we are unfortunately tasked with thinking through and planning for the worst case scenarios. It is always easier (and significantly less expensive) to address possible negative outcomes and set a path for resolution that everyone is clear on and agrees with ahead of time, when everyone is getting along, than after the fact, when people are significantly less likely to be willing to work together. This is one of the reasons we advise our co-owned company-clients to enter into buy-sell agreements with their co-owners early on. A buy-sell agreement protects the company and its owners when a co-owner voluntarily or involuntarily leaves the company, or when there is a significant dispute or change of heart about how the company should operate.
The purpose of the agreement is to predetermine how the owners’ ownership interests will be sold or transferred upon the happening of certain ‘triggering events.’ While the triggering events vary based on the company’s needs and goals, the most common triggering events include: divorce of an owner, death of an owner, bankruptcy of an owner or other assignment to creditors, permanent disability of an owner, or an owner’s withdrawal from active participation in the company. It is basically a prenuptial agreement between business owners.
The buy-sell agreement lays out the options the company and other owners have in the event a triggering events occurs. For example, in the event of the death of an owner, many companies want the option to purchase the deceased owner’s interest from his/her estate rather than having the estate retain the ownership interest in the company (and potentially inserting a stranger into the business operations). The buy-sell agreement would state exactly what the rights of the company and other owners are, including the formula for determining the value of the deceased owner’s ownership interest and setting out payment terms should the company elect to purchase the shares back.
To ensure the availability of funds in the event of an owner’s death, many parties will purchase life insurance policies on each of the owners. Thus, in the event of death, the proceeds from the policy are used to fund the purchase the deceased owner’s interest.
While no one expects to get into disputes with their co-owners during these major events, the reality is that no one can predict the future and prudent planners will find a way to proactively address just what happens in the event a business relationship takes an unexpected turn. A properly thought out and drafted buy-sell agreement can prevent fighting between family members, co-owners and spouses, keep the business afloat, and avoid liquidity problems that often arise on during these unforeseen events.
If you are interested in discussing whether a buy-sell agreement is necessary for your company, the attorneys at Navigato & Battin are here to help.