George and John were partners for 20 years in their aerospace corporation. After George was killed in a car accident, questions arose as to what role George’s widow, June, would play in the company, and if none, how John would buy her out.
Unable to agree, the dispute wound up in court where a jury decided the fate of the business.
Meanwhile, John had problems keeping the company afloat. He could not make important decisions without June’s consent, which seldom came.
Mary and Bill, two longtime friends, decided to open an online retail business. Initially it was highly successful. Then Mary began divorce proceedings against her husband, Ted.
Ted, who had not had a job for several months, depended upon the income from Mary. Now, with the divorce looming, he wanted to be bought out by Mary and Bill at an exorbitant price. If they were not willing to do so, then he planned to make life difficult for both Mary and Bill and their company, since he would now own 25 percent of it.
Scott, Sandra, and Irving got together to start a business buying and selling foreclosures. Each person brought a unique skill to the enterprise. After flipping 15 homes, the other two discovered that Irving’s drug problem. As a result, he wasn’t pulling his share of the workload. Moreover, he was the sole real estate broker in the group, so losing his participation meant significant delays in finding and buying new homes.
Irving denied any drug dependency and fought all efforts to remove him. The battle stalemated the business to the point where it finally closed.
These are just three scenarios which, unfortunately, happen every day. People start businesses with friends, relatives and sometimes even spouses. Typically, everyone is optimistic that they will be successful. After all, everyone has the same goal – to make money. Then something unforeseen happens, such as what is discussed above.
Other things can occur, also, such as someone contracting cancer and being away from the business for a long time. Or, one of the business partners commits a crime or does something that heaps scorn upon the business. Or someone just has a change of heart and decides to do something entirely different.
Despite the predictability that at least one of these events will occur, many business owners do not plan for it. Then, when the question comes up about handling unplanned for events, the owners find themselves dealing more with those issues than running their business.
This can be avoided, or at least the impact can be minimized, with a buy/sell agreement.
A buy/sell agreement provides the outline for how a business and its owners will handle changes or fluctuations in ownership.
For instance, the agreement can provide that whenever someone wants to sell his interest in the company, he must first offer it to the other owners before shopping it on the open market.
Also, the owners can agree that if one of them dies, the surviving owner(s) will buy out the deceased owner’s spouse. This gives some immediate income to the family and allows for an orderly transition of ownership.
The agreement should establish how to value each owner’s interest in the company, and how and when payment is made to buy out that owner’s interest. The owners can agree to buying life insurance on each owner to pay off their interest if they die.
A well-drafted agreement will provide that the spouse not involved in the business will also be bound by the agreement, even in the event of divorce. The owners can also agree on how to handle other problems, such as an owner’s long-term disability or the termination of an owner’s employment from the company.
One of the attractions of a buy/sell agreement is that the owners can sit down and work out their differences while they are still getting along, without the pressure of responding to an immediate crisis.
Going through this process forces businesses to deal with the future. It highlights the strengths and weaknesses of the relationship between the owners. I have often seen where negotiating the agreement brought the owners closer together.
If you don’t plan the future, you can be assured that one of these problems will hit your business, probably when your company can least handle it.
The message for business owners: You can see an attorney now, to quickly and inexpensively draft your buy/sell agreement, or you can see your attorney later and look forward to lengthy and costly attorney services or, at worst, litigation when you’ve been sued by your former business partner.
The choice is yours.
Carl Kanowsky is an attorney in Santa Clarita. He can be reached at cjk@kanowskylaw.com. Visit him online at www.kanowskylaw.com.
Buy-Sell Agreements and Why Every Company Needs One | Commentary by Carl Kanowsky Esq.
