Why You Might Need a Buy-Out Agreement

Business Attorney Mark Holmes Newport Beach, CA

Business Attorney Mark Holmes

If you are doing business as a corporation or limited liability company, and you have “partners” – people who are either shareholders, members or persons with equity interests in the business, you should have negotiated and executed a buy-sell agreement. Please note that if you are a member of a limited liability company, and have signed an operating agreement, you may already have entered into a buy-sell agreement, as such are frequently included as part of the limited liability company operating agreement. Now would be a good time to go read the agreement!

If you have not knowingly executed a buy-sell agreement, this may seem a bit new – and uncomfortable. So here goes.

First, think of some significant things that can happen in life: death, divorce (or marriage), physical or mental illness or incapacity; bankruptcy (or becoming destitute), retirement and in many cases, just wanting to quit doing business or working in general.

Second, take a look at yourself and your business “partner” or “partners” and think about the impact of any of these events occurring – to you or them — on your business and, ultimately, the ability of the business to survive such an event.

For reference, please consider that if there is no buy-sell agreement in place when one of these events occurs, a business almost always fails — the “partners” or their spouses, heirs, etc. litigate the business into oblivion fighting over control of the business, or its assets. In addition, there is frequently no insurance in place – a key component of a buy-sell agreement – to pay for a “buy out” that may have to occur.

The purpose of a buy-sell agreement therefore is clear: it is an agreement to ensure that if a significant event occurs to one or more “partners” or shareholders in a business, there is a plan in place to try to deal with it – so the business can survive.

And now for the objections. Some business owners don’t want to even discuss buy-sell agreements with their fellow shareholders or “partners,” because they fear that by doing so, they will cause disagreements between the “partners” or shareholders that could lead to the demise of the business. (This happens a lot at the inception of a business).

Actually, just the opposite is true. Most business “partners” or shareholders are usually relieved to address these issues (especially as the business is starting up) – and often tell me they have been stressed out and anxious because these matters have not yet been addressed.

In addition, if a business “partner” is really concerned about having disagreements with the other “partner” or “partners” that could lead to the demise of the business, I have often found that both the business and the “partners” have many other issues they really need to discuss and work out as well – and a buy-sell agreement is an excellent catalyst for beginning those discussions – because the issues are not going to go away if they are not addressed. Indeed, they almost always become much worse as the business grows!

Finally, there are business people who decline to negotiate and enter into buy-sell and shareholders agreements because they would rather avoid uncomfortable topics such as death, divorce, incapacity. However, such people should consider these questions: is it better to be a little uncomfortable and hash out a plan for keeping business going if some unpleasant event occurs? Or is it better to avoid such issue and leave the business completely unprepared to deal with them and as a result, have the business fall apart when an event occurs?

Most people would choose the small discomfort to get a plan together so their businesses will survive the tempests of life!

Consequently, if you are doing business as an entity; there are lots of good reasons why you should have a buy-sell agreement; and no really good reasons why you should not. Therefore, if you have business “partners” or fellow shareholders, I strongly suggest you get to an attorney who knows what he or she is doing so they can advise you on how to put a workable agreement in place. If you need a referral to such an attorney, feel free to contact me at Mark@mdholmeslaw.com or call me at (949) 645-0450.