Lots of limited liability companies (LLC’s) have multiple owners (members), and having a buy-sell agreement in place should be a priority. A buy-sell agreement provides the layout for how ownership in the company can be transferred. It’s an internal contract between the partners that details how they can get out, or otherwise leave the business.
What happens when a partner wants to retire, sell his or her share, gets divorced, get convicted of a crime, dies or becomes disabled? You can address all of these situations in a buy-sell agreement. It’s a lot cheaper and a lot less time consuming to have it upfront, as opposed to dealing with that situation when it happens. If your LLC has multiple partners and doesn’t have a buy-sell agreement, you are potentially facing some situations that will be very disruptive and seriously impact your business value.
What Triggers A Buy-Sell Agreement?
Typically, a buy-sell agreement includes some sort of trigger, that causes it to kick in. It can be custom events that are specific to the business and the partner based on their business. There are also some fairly common triggers that should be included as well, such as:
- Retirement. What’s going to happen when a member wants to retire? There should be a provision that details what that process looks like and how the retiring members ownership interest will be purchased.
- Disability. What if a member becomes disabled and is no longer able to perform their duties with the LLC? Typically, remaining members will purchase their share, but you need to know how.
- Bankruptcy. Filing for bankruptcy could force a member to lose their interest in the company, but a buy-sell agreement could give the remaining members the ability to purchase back that membership interest.
- Death. If a member dies, their ownership interest may pass to their estate and the remaining members now find themselves as partners with a new person they never had any intention of working with. You can use a buy-sell agreement to prevent this from happening.
- Default. The company operating agreement may spell out certain duties and responsibilities of the members. If someone isn’t living up to their obligations, the buy-sell agreement could trigger a way for that member to have their share purchased.
- Felony Conviction. The members may not be interested in working with a partner who has a felony conviction, and depending on what it was for, it could be very bad for business. A buy-sell agreement can let the other members purchase the ownership interest of that partner.
What to Include?
There are numerous clauses and sections that can be included in a buy-sell agreement to meet the specific needs of a business or the members. After all, they are an internal contract created to protect the company and the owners. Here are a few things that should probably be considered:
- How to value the purchase price. Put in some mechanism that determines what the purchase price for a membership interest will be. Here are a couple of examples: You can set the amount upfront, in the agreement, establish some formula that sets the buyout price, or agree that an independent appraiser will set the value. Whatever the case may be, find a way to set how the purchase price will be determined.
- Rules on who can purchase. Again, you can set whatever rules work for you, just make sure you do it and understand them. Can only current members purchase an interest; do existing members and the LLC get rights of first refusal; can the interest just be sold directly to a 3rd party?
What Happens If You Don’t Have a Buy-Sell?
Without a buy-sell agreement your business could find itself facing some difficult issues down the road that could impact its continuation and long term success. What will you do when a member wants to quit, retire, dies or you want to replace them if you haven’t already addressed those situations? It may be possible that you’re facing a court case that would be very time consuming and expensive. It protects your business and helps to avoid potential conflict between business partners.
Buy-sell agreements are important and should be crafted to fit the individual needs of a business, contact Launch for help and a free consultation if you’re small or medium sized business needs one.