Owning your own business can be tricky. When partners are involved, it can become even more complicated, especially if something were to happen to one of them.
A Buy/Sell Agreement is an agreement between the owners of a business that details what is to occur if there are significant changes in the life of a business partner. Divorce, personal bankruptcy and death are only a few of the changes that can adversely impact a business partnership. However, with a properly constructed Buy/Sell agreement, the headache of dealing with these changes can be minimized and your business can continue to thrive.
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For example, you and a co-owner have been in business for years. If your partner were to die prematurely, his widow might want to continue to take the same money out of the business that her husband had received when he was living. If the widow is left in a difficult financial situation, she may force a sale of her inherited portion of the business in order to make ends meet, derailing your plans. Situations such as this can be avoided by executing a Buy/Sell agreement. The agreement sets forth the purchase price to be paid for the deceased partner's part of the business, or it provides a formula for determining the price. The agreement can have a mechanism for providing the funds needed to make the purchase. The agreement can call for a life insurance policy to be purchased, and upon the death of a partner, the money received can be used to buy the widow's portion of the business. This allows you to continue your work while at the same time providing for the widow's interests.
Because Arizona is a community property state, a partner's divorce can lead to the division of your business between your partner and his ex-wife. In community property states, all earnings during marriage and all property acquired with those earnings are considered community property, owned equally by husband and wife. When property is divided during a divorce, each spouse can claim a right to all community property. To avoid this prospect, a good Buy/Sell agreement may require the ex-wife of a divorced partner to sell any interest received in a divorce settlement back to the company, according to a valuation method provided in the agreement. A recent Arizona case involved a well-drafted Buy/Sell agreement which prevented an ex-spouse from causing such problems, and even required the ex-spouse to accept a discounted value, paid over time, for her share of the business.
A business partner's personal bankruptcy can throw an unexpected wrench into your company's plans. In some scenarios, a bankruptcy trustee can liquidate the assets of your business and take your partner's share to satisfy his personal debts. Even though the business is managed properly, your partner's debts could ruin all the progress you've made in your business. A well-drafted Buy/Sell agreement can ensure this doesn't happen to you. The agreement could require that your partner notify you of his filing for bankruptcy immediately, and give you the right to buy his portion of the business
For most companies, providing large lump cash payments to a divorced or bankrupt partner is not feasible. In the Buy/Sell agreement, terms can be established to alleviate any cash flow worries. An agreement can provide for a down payment followed by installments over a certain number of years with a reasonable interest rate.
A qualified business attorney is experienced and available to assist in constructing Buy/Sell agreements. Rely on their experience to help you avoid any unforeseen and potentially harmful changes to your business by creating a Buy/Sell agreement.
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