When a business is owned by more than one individual, the owners never think about the death, disability, or divorce of an owner, or even that another owner might quit. How do you deal with these situations? If an owner dies, becomes disabled or quits, the other owner(s) traditionally do not like the idea of continuing to work hard to grow the business when that piece of growth goes to either the other owner’s family or to the other owner himself even though he or she quit the business.
However, without a Buy-Sell Agreement, there is not much the surviving owner or owners can do under those circumstances. The other party does not have to sell his or her interest; thus, the need for a Buy-Sell Agreement. A Buy-Sell Agreement provides that if an owner dies or becomes disabled, the other owner(s) or the company has the right to buy his or her interest. A good agreement will state how the price is determined, the terms of the purchase, the terms of any promissory note that might be issued, and the security agreement. However, from a business perspective, the death of an owner is the easiest to address. Insurance can be purchased on the owners to pay for any purchase price.
Owners who become disabled
- How do you define disability?
- When do the other owners have the right to buy him or her out?
- What are the terms?
- Is it paid out over 5 years? 10 years?
- What is the interest rate?
- How much of a down payment?
- Is there a “due on transfer” provision so if the company is sold all amounts due and owing under the promissory note will be paid at the time of sale?
Owners who divorce
- How does a divorce affect a business?
- Is company ownership interest community property?
- Does the owner’s spouse have a right to an interest in the company?
- What is in the best interest for the company, buyout the spouses ownership interest?
- Is it the best situation to find yourself in business with the ex-spouse of one of the owners?
Owners who die
- What if the owner dies and leaves all of his or her interest to someone other than the surviving spouse.
- What if the owner leaves his or her interest to a child?
- What if the owner leaves his or her interest to an unnamed source, church. charity, etc.?
In the event that the owner does any of the previous, the Buy-Sell Agreement will protect all involved parties, partners, etc. of an untimely event that could affect the business and its future. Asking these simple questions and addressing your concerns with a professional at Rink & Robinson, PLLC could protect your business interest.