When going into business, the last thing the owners want to consider is the demise of a partner or the business itself. There’s an old proverb that says a partnership is easy to get into but hard to get out of (well, maybe it’s not exactly a proverb, but it has been said). With that in mind, small business owners need to know how to get out of a business venture that is no longer working. As with most things, the best way to do so is with advanced planning. To that end, a buy-sell agreement is an important document for partnerships (and possibly LLCs and small corporations) to enter into when forming the company.
While buy-sell agreements can be substantial in scope, the agreement can and should provide for at least the following provisions:
1. A clause that requires a “forced” sell of the interests of a partner (member, shareholder) for major unlawful activity. While minor offenses probably shouldn’t be included in this provision, felonies and/or offenses involving moral turpitude should be considered so the company can protect its good name. Likewise, if it is a professional association, this clause could require the sale of the interests of an individual who loses his/her license.
2. A clause that allows a buyout of a deceased partner’s shares. In some instances, however, the company may choose to not buy such shares. In that event, the below provision should be incorporated.
3. A restriction of the voting interests in shares that are inherited by a third party. Doing so ensures that a person not intended as a decision-maker for the company will not be thrust into that capacity. In this instance, the owners of the shares would have “passive” ownership status. They would be able to share in the profits of the company, but would have no decision-making ability.
Drafting a good buy-sell agreement will avoid numerous headaches in the future. It is a highly recommended document for early-stage companies.