By Jim Newman, Holland & Hart LLP
Your business is successful, things are going fine, and then you come to work on Monday morning to find out that a tragic car accident claimed the life of one of your fellow owners. Or, one of your fellow owners comes into your office and tells you he and his wife are going through an ugly divorce.
Your reaction is grief in the first instance and feeling bad for your colleague in the second instance. Often, an important question doesn’t register – what is going to happen to the stock or other equity that is held by your fellow owner in either instance? There are any number of things that can go wrong in a business with multiple owners that can keep the owners up at night. A buy-sell agreement (they come in different forms and with different names) can help everyone sleep better at night.
Some business owners aren’t aware that shares of stock, limited liability company interests and other types of equity are personal property that are freely transferable unless transferability is restricted by contract. Without an agreement, stockholders may be forced to deal with a buy-out of another owner at a time when circumstances are less than ideal. And, if there is no buy-sell agreement in place, there won’t be any pre-established or agreed upon terms and conditions governing the buy-out of the departing owner.
What issues should be addressed in a buy-sell agreement? The most important topics are triggering events, valuation and payment terms. Some of the most common triggering events are death, disability, dissolution of a marriage, termination of employment of an owner, an owner simply wants to leave the company, and bankruptcy of an owner. Valuation is the process of determining the price of the equity interests to be transferred. This is important because with closely-held companies, there is no market or exchange to value the interests. Payment terms are often a challenge because the departing owner may want the buy-out amount in cash, but the business has its own cash needs and perhaps can’t afford paying the departing owner in cash.
These issues are complex and often difficult to discuss among owners. But dealing with these issues earlier rather than later is almost always recommended. Your business and your livelihood (and that of your fellow owners) merit serious consideration of a buy-sell agreement for your company.
About the Author: Jim Newman helps manufacturers manage a wide range of day-to-day legal affairs from entity selection and formation to corporate governance and compliance to evaluating and executing strategic business combinations to acquire or sell assets or equity interests. Clients appreciate Mr. Newman’s business-savvy, pragmatic approach in his role as outside corporate counsel and as a transactional advisor to public and privately held companies. He approaches clients’ challenges with a unique perspective based on his experience in sales and marketing management for a division of a Fortune 500 company prior to becoming a lawyer. Jim is the administrative partner overseeing management of the firm’s Reno and Carson City offices.