For companies that are owned by more than one individual, forming a buyout (or buy-sell) agreement is an important part of protecting the business in the future. While it is not a necessary condition to business formation to have a buyout agreement, it is highly advisable. The future is unpredictable and, as a result, business owners need to have a plan in place in the event changes to ownership structure occurs.
What is a Buyout Agreement?
A buyout agreement is a binding contract between the owners of a company that controls the manner in which an owner may sell their interest in the company, as well as which individuals may buy that interest and the price they will have to pay. It is common to use prenuptial agreements as an analogy to buyout agreements. In other words, owners may plan to always own their interest in the company, but, in the event changes occur, the buyout agreement controls what will happen with that ownership interest.
Ideally, buyout agreements will be formed at the formation of the business. Further, they are important whether the business is formed as a corporation, partnership, limited liability company, or even, in certain circumstances, a proprietorship. Some of the more common situations when buyout agreements become important include when a co-owner:
- Retires or wishes to leave the company;
- Files for bankruptcy;
- Becomes disabled;
- Goes through divorce and his or her ex-spouse will receive part or all of the interest in the company; or
Why is this Important?
Buyout agreements are important to help in avoiding disputes that may arise between remaining owners regarding whether to buyout a selling owner’s interest and for what amount of money. If the dispute is serious enough, it may result in the co-owner’s ending up in court. Even worse, in a partnership, it is possible that a partner leaving will result in the partnership being dissolved if a buyout agreement does not exist. If this happens, the remaining partners will have to go through the process of forming a new partnership.
In addition, buyout agreements control who may buy an owner’s interest in the company. This is critically important because the remaining owners may have strong opinions on who they would like to own the business with. It is very likely they entered into the ownership of the business with people they trusted. When one of those co-owners decides to leave, it is vitally important that the individual buying that ownership interest is trusted by the remaining owners.
Further, even for a company owned by only one person, a buyout agreement can be important in directing what will happen to the company when the owner wishes to transfer ownership or dies. For example, an owner may decide to have the company sold to a key employee, rather than having it passed to a family member, upon the owner’s death because that employee may be in the best position to successfully run the business. A buyout agreement is also important to help in avoiding the possibility that the company will simply wind down or dissolve upon the sole proprietor’s death.
Small Business Help
There are many future uncertainties that your company will face. But, with the proper planning, these uncertainties can often times be addressed. If you would like more information about buyout agreements, or the formation of businesses generally, speak with an experienced attorney at the Philadelphia Small Business Law Center.