Issues for Consideration in Buy Sell Agreements

Disputes and ownership transitions among business owners are virtually inevitable. Having in place an agreement which has provisions for resolving such disputes and providing for ownership change will often determine whether a business will be able to continue to grow and succeed, or collapse under the strain of controversy among the owners.

Dispute resolution and ownership transition mechanisms can be incorporated into the “Buy Sell” provisions contained in the Shareholder, Operating and/or Partnership Agreements (“Buy Sell Agreements”) of Corporations, Limited Liability Companies and Partnerships.

In addition to providing for the sale and transfer of ownership, a Buy Sell Agreement should contain provisions setting out the parties’ expectations for their participation as well as rules for governance for how decisions are to be made, how the business is to be managed and under what circumstances a greater then majority vote may be required.

In addition to conflicts regarding governance of the business, another primary source of tension and conflict among owners is when an owner feels hopelessly trapped in the business relationship. A Buy Sell Agreement should not necessarily make it easy or inexpensive for an owner to decide to leave, but it should provide means for a reasonable departure. Therefore, a Buy Sell Agreement should provide that if one owner can’t reach an agreement with the others and wants out, that he can cash in his chips (often at some discount) and leave the game.

In preparing a Buy Sell Agreement, you need to address the present needs of the parties as well as anticipate and provide flexibility for issues which may take place well into the future.

Buy Sell Agreements should contain provisions that are specifically designed for your business, including, but not limited to:

• Events which give rise to its application. These should include setting forth the “triggering events” such as death, disability, dissociation and deadlock.
  
  
• Restricting transfers. Most business owners go into the venture with the expectation of knowing who they are going into business with. Therefore a Buy Sell Agreement should provide restrictions on transfers, including consideration of allowing the business (or its current owners) an opportunity to acquire the ownership interests.
  
  
• Methods of determining price. These methods could include establishing a fixed price, developing a valuation formula, providing rights of first refusal and determining how to "cut the pie.” Each of these methods has advantages and disadvantages, so it is important to carefully consider an appropriate method of valuation which addresses both the present value, and the method for determining the value in the future.
  
  
• Methods of payment. A Buy Sell Agreement should provide how the purchase price once determined is to be paid. This would include whether a part of the purchase price may be paid by a promissory note, and if so under what terms.
  
  
• Confidentiality, Non-Solicitation and Non-Compete provisions. Certain provisions should be strongly considered when an owner decides to depart the business: whether to restrict the departing owner from disclosing confidential or proprietary information obtained while working with the business, to restrict him from soliciting customers or employees of the business, or to restrict him from competing with the business after his departure. Such provisions can have a significant impact on the value and future viability of a business.

While disputes and transfer of ownership interests in a business are virtually inevitable, careful planning now can increase the likelihood of a successful resolution or transition in the future.