Buy/Sell Agreements

Buy/Sell Company Agreement Document California

Future is inevitable, even for the businesses. Still, new entrepreneurs overlook stipulating how impending changes in the future are going to affect the overall control and management of the business. This is the reason why Buy-Sell Agreement in California is a necessary document for the business partners.

Let us exemplify the importance of Buy-Sell Agreement for you. Have you ever thought what will happen if your business partner dies or becomes incapacitated or disabled in any way? Or if your business partner who also happens to be your spouse files for a divorce? Or if there is a bankruptcy? We understand many of you have never thought about these situations occurring to you, nor do you have any clue how to address situations like these, pertaining to the control of business. Thankfully, we have Buy-Sell Agreement in California to look after these issues for us, before things really get ugly for us.

What is a Buy-Sell Agreement?

It is a legally binding agreement between a business and the business owners, clearly specifying what will happen to the business in the event of death, divorce or a disability or any form of the departure of a partner. This legal document will specify:

• Under what circumstances or in which situation, when, a business may dispense with an owner’s interest?

• Will there be any opportunity for the other business partners to buy the owner’s interest before disposing of to an outside party?

• What will be the charge for that owner’s interest?

• Who will be accepted as the substitute owner by the remaining owners or partners?

Triggering Events

Events probably prompting the remaining owners to buy the business interests of the departing owner are known as triggering events, as they trigger the buyout option in the remaining business owners.

Here is a list of some of the most common triggering events:

• Death: What will happen if a business owner dies? Who will inherit or buy the business interests of the deceased owner, the legal heir or the remaining partners?

• Disability: This requires a proper legal certificate certifying the disability of the owner then only it can be called a triggering event. This disability is considered only if the owner is not able to perform his/her normal course of business for a stipulated period of time (three months in many cases).

• Termination of Employment: Are the business owners employed? Are they otherwise active in business interests? What will happen if the owner retires, resigns or is terminated from his/her active leadership role? This triggers the buyout of the departing owner’s interests.

• Divorce: Who would want to work with an ex-spouse as business partners, therefore in the wake of divorce, the divorcing owner will have the first option to buy his or her business interest back from the other partner who is leaving.

• Bankruptcy: Remaining business owners and the business have the option of making a buyout of the bankrupt business owner.

Why have a Buy-Sell Agreement?

Under the triggering events or the specified circumstances of a partner’s death, disability, divorce or departure, a buy-sell agreement facilitates proper transfer of business interests. This legal document:

• Engenders a market for the departing or deceased business owner’s interests which would have been not possible in the absence of a buy-sell agreement.

• Prevents a halt that may damage the management and control of the business.

• Ensures job stability of the rest of the owners and important non-owner employees.

• Makes sure that the dependents or the survivors of the deceased owner are compensated well for the deceased owner’s interests.

• Creates an opportunity for the remaining owners to buy shares of the deceased owner, thereby avoiding locking up of the dead owner’s interest in probate

• Sets a fixed value for buying of the deceased owner’s interests.

• Determines every owner’s interest in the business

There are three primary buy-sell agreements in California:

• The ‘redemption’ agreement: Business has the power to purchase the interests of a departing business owner.

• The ‘cross purchase’ agreement: Remaining owners purchase the departing owner’s interests.

• The ‘hybrid’ agreement: Both the business and the remaining partners may have this option of buying the interests of the departed/departing business owner.

How Value of a Purchase Determined?

Under the effect of any one of the triggering events, a buyout of the departing owner’s interests is called for. Therefore, it is important to set the price of an interest. According to the buy-sell agreement, the purchase price of an ownership interest can be equal to the interest’s fair market value. The following are the determining factors that set the fair market value of an ownership interest:

• Industry trends and economic outlook

• Book value

• Nature and history of the business

• Financial position

• Net profitability of the business

• Earning capacity of the business

• Market price of similar ownership interests

• Comparable sales of interests

• Existence of intellectual property assets and goodwill

TLC is a market leader in creating Buy-Sell Agreement in California, crafted by licensed

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