Buy-Sell Agreements: An Introductory Guide for California Business Owners
A buy-sell agreement is a contract between or among the owners of a company (e.g., corporation or LLC) that outlines the conditions under which the ownership interests of a company can be transferred. It is a critical document for businesses with multiple owners, as it provides a framework for handling the transfer of ownership in the event of unexpected events such as death, disability, or retirement. A buy-sell agreement is sometimes called a stockholders' or shareholders agreement for a corporation. In limited liability company, the provisions that are included in a buy-sell agreement are often included in the LLC's operating agreement.
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Why are Buy-Sell Agreements Important?
Having a buy-sell agreement in place can provide peace of mind to business owners. It ensures that ownership of the company can be smoothly transferred in the event of an unexpected occurrence, and that the value of the company is protected. The agreement also can prevent disputes between owners and provide a clear path for the transfer of ownership.
Types of Buy-Sell Agreements
There are two main types of buy-sell agreements: cross-purchase agreements and entity purchase agreements.
- A cross-purchase agreement involves each owner buying a life insurance policy on the other owners, with the proceeds from the policy used to purchase the ownership interest in the event of the owner's death.
- An entity purchase agreement, on the other hand, involves the company purchasing the ownership interest of the deceased owner. The company then sells the ownership interest to the remaining owners or to a third party.
What Should be Included in a Buy-Sell Agreement?
A buy-sell agreement should include the following information:
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The trigger events that will activate the agreement.
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The method for determining the value of the ownership interest.
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The procedures for transferring ownership.
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The responsibilities of the remaining owners or the company.
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The funding mechanism for the purchase, such as life insurance, or the use of a sinking fund.
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The restrictions on transfer of ownership.
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The terms for resolving disputes.
Takeaway
A buy-sell agreement is a critical document for businesses with multiple owners. It provides a framework for handling the transfer of ownership in the event of unexpected events and protects the value of the company. It is important to carefully consider the terms of the agreement and to work with a qualified attorney to draft an agreement that meets the specific needs of your business. Every small business operating as a corporation or an LLC with more than one owner should have a Buy-Sell Agreement in place with its shareholders or members.
DO IT RIGHT
There are many nuances to a properly crafted Buy-Sell Agreement and many intersecting areas of the law. The Buy-Sell Agreement should be carefully prepared to protect the specific interests of the owners in their unique and particular circumstances. Contact an experienced business / corporate attorney if you are contemplating entering into a confidentiality agreement. Make an appointment now for a free consultation.
This article is not legal advice, but is provided for general information purposes only: see the disclaimer in the footer of this site, and read Legal Notices here.