If you are entering a partnership, shareholder or Limited Liability Company (LLC) Operating Agreement with another party, it is important to draft a solid contract. Although you may not think it is necessary because the other party is somebody you trust, having an agreement in writing can help avoid legal disputes in the future as well preserve your relationship.
In some jurisdictions (such as New York), it is not a breach of contract for a party to withdraw from a partnership that was created orally. See Gelman v. Buehler. In other words, a partnership may be dissolved unilaterally if there are no particular terms or undertakings specified in the underlying agreement. This, in addition to the important issue of joint liability, is why I typically dissuade people from using straight partnerships.
There are a variety of important terms to include in this type of written contract, but the buyout agreement terms require special attention. The Buy-Sell Agreement is an agreement among business owners to purchase or sell a business interest after a specific event, at a determinable price and on predetermined terms. The purchase or sale may be mandatory or optional and the agreement may give purchase or sale rights to one party, all of the parties, or to the company.
Below are three important purposes of a Buy-Sell Agreement:
- The owners of the business may want to place restrictions on who can become a new co-owner. For example, if a co-owner dies or gets divorced, his or her interests could transfer to a spouse or children if a buyout agreement is not in place. The agreement includes a general prohibition on the sale of transfer of ownership interests, except under the circumstances specified in the agreement.
- The owners of a business may wish to “create a market” for the sale or transfer of their ownership interests. Owners of a small business typically do not have a ready market to sell all or a portion of the business, so the Buy-Sell Agreement can provide a means for the purchase of it.
- The mechanism for determining the purchase price of an owner’s interests can be specified in the Buy-Sell Agreement. In fact, the agreement can set forth how the purchase price will be paid. This can prevent disputes that commonly arise between “selling” owners that typically have a different perspective of fair price or terms of payment than those of the remaining owners.
There are many other factors that should be considered in a Buy-Sell Agreement, which will be covered in future blogs, so please check back for more information. Or, to learn more about buy-sell agreements and how to protect yourself or how we can assist you with other business-related matters, contact Leslie S. Marell today.