Were you ever in your conference room and your clients tell you – “We are family (or we’re best friends since birth), we don’t need documents protecting us from each other!” These of course are the very business owners that actually do need such an agreement.
Business disputes among owners are commonplace and are even more so with family members. Business partners could decide on a different direction for the company, take off and travel for years, become incapacitated, or worse, die.
Protections, or put another way, “orderly procedures” must be in place. A Buy-Sell Agreement provides a legally binding framework establishing set procedures and rules that in some cases restrict, and in others force, the transfer or sale of ownership in the company and provide for the financial terms (i.e., critically important seller financing). A Buy-Sell Agreement can be entered into between the parties as a standalone document or as part of a Shareholder Agreement.
The Buy-Sell Agreement can be triggered by death, disability, change in control or other significant event, such as impasse on a major business decision. It could state an owner can’t sell unless X happens or Y financial success, or must sell if Z occurs. The most critical element of a Buy-Sell Agreement is the price setting formula. There can be a fixed price where there is a set dollar amount per share, a formula like book value, adjusted book value or multiple earning formula and lastly, a value based upon a business valuation of the company performed by third party valuation experts.
A periodic review of the rules and manner in which to fund a purchase are necessary to monitor and comply with the law, ongoing changes, and new circumstances in the business.
The problem, seen all too often, is what happens when there is no Buy-Sell or Shareholder Agreement. The best way to describe the outcome is this: complete and utter mess, that ends in protracted and costly litigation where third parties (judges, arbitrators, juries) get to make decisions about which business owner gets what and when. It never resolves in a way that business owners would welcome or expect.
Take it from my experience, It is not something business owners ever want to deal with.
The key is to put one in place at the outset, or, before any issues arise. Whatever the triggering event or the mechanism, Buy-Sell Agreements can be customized for each specific business owners and relationship, making it – very good business.
Michael C. Carroll, Esq., Managing Partner, CorpGen Counsel brings a wealth of securities, governance, M&A, private equity, real estate, transactional, and general corporate law experience to public companies, privately-held companies, private equity firms, and individual clients. Mr. Carroll was previously Senior Vice President, Chief Compliance Officer, and General Counsel of Medallion Financial Corp., a NASDAQ-traded commercial lender and FDIC-insured bank, and was Senior Counsel of Aames Investment Corporation, a NYSE-traded real estate investment trust. Prior to his in-house positions, he practiced in the corporate law department of the international Am Law 50 law firm of Willkie Farr Gallagher, LLP in New York.