Last year I was retained by a few clients to either draft new or review and revise their existing buy/sell agreements.
In one case, it was the owner/operator of various restaurants who (following 20 years in business without any written agreement among the shareholders), determined the time was ripe to enter into a formal agreement with her business partners to create a clear “succession plan” for the business. I was referred to work on this matter by the corporation’s accountant, and I drafted a shareholders agreement, which included buy/sell provisions.
At the risk of acknowledging attorneys’ use/have form documents, I recently leveraged that document when I was retained to rewrite the buy/sell agreement for another corporation in business for 8 years.
What is a buy/sell agreement?
A buy/sell is a forward-looking strategic agreement among the shareholders, partners, or members of a business (each a “Principal”), intended to ensure business continuity following the occurrence of certain significant events, such as the death, divorce, disability, or departure of a Principal.
An effective Buy/Sell describes (i) when and under what circumstances a business may dispose of a Principal’s equity, (ii) whether the remaining Principals have an opportunity to buy the equity from a departing Principal before a sale to an outside party, (iii) what the purchase price will be for such equity, (iv) how the buyout will be funded, and (v) who the remaining Principals are willing to accept as a new owner of the business.
It’s noteworthy that the clients I referred to above had been in business for a significant number of years since it’s generally considered easiest to formalize agreements among Principals when everyone is happy with each other and before any resentment develops over who works harder and contributes more time and effort to the business.
Why is it important for the owners of a small business to have a buy/sell agreement?
Without such an agreement, the remaining Principals may face challenges managing the business and dealing with the departing Principal’s equity. Without a clear succession plan, disputes can arise among the remaining Principals and/or the surviving spouses regarding what will become of the departing Principal’s equity. An effective buy/sell agreement can help avoid business disruption and/or potentially costly litigation. For closely held businesses, often spending a bit of money upfront results in savings of time, money, and aggravation later.
If you or your business partners need help drafting these contracts or reviewing current buy/sell agreements, Aimee B. Davis Law P.C. is available to assist you.
Aimee B. Davis Law P.C. is committed to advising its clients and resolving issues relating to the legal and business matters that are important to them. If you have any questions, please feel free to contact us at (917) 617-2243 or email aimee@aimeebdavis.com.
Aimee B. Davis Law P.C.
