A buy-sell agreement is a binding contract between co-owners that controls when owners can sell their interest, who can buy an owner’s interest, and what price will be paid for that interest. There are many situations these agreements can be used in, including when an owner retires, becomes disabled, dies, retires or divorced.
In some cases, a divorce or bankruptcy could affect the business. In non-community property states, such as New York, spouses can argue in court that they are entitled to a partial interest in the business, and could be awarded part of the business. It’s important that the buy-sell requires the former spouse of a divorced owner to sell any interest received in the divorce settlement back to the company, or the other co-owners according to a price listed in the buy-sell agreement.
The bankruptcy of an owner should also be addressed in the buy-sell agreement. If an owner of the business contemplates bankruptcy, the buy-sell should require him or her to notify the other co-owners before filing bankruptcy, which will allow them to purchase the ownership interest.
Buy-sell agreements will address how the business should be valued for the buy-out, to avoid fighting over valuation when the time comes to purchase the ownership interest. They may agree to use professional appraisers to determine the value, or set out a formula, such as a certain percentage of the income of the previous year, to determine the value of the business.
In some cases, it can be difficult for the co-owners or the business to immediately buy 100 percent of an owner’s interest. Therefore, there should be flexible payment terms built into the buy-sell agreement. Also, buy-sell agreements are frequently used in conjunction with life insurance or disability insurance that will provide cash to pay for the business.
If you are a co-owner of a business, and you wish to provide for the ownership of the business in the event of death, disability, retirement, or other contingencies, call the New York Business Attorneys at Friedman & Ranzenhofer, P.C. at 716-542-5444. We will be happy to help you with your buy-sell agreement.