Whether you are an owner in a partnership, limited liability company, or close corporation, you should plan for the future. If you or another owner decides to leave the business, can you sell your share to anyone? What if an owner dies or acts in bad faith? It is crucial to seek counsel from a skilled attorney before this situation forces your company into litigation or bankruptcy if owners adamantly disagree.
Owners contribute their expertise and good faith to making a business succeed, and they can extend that acumen to how departures are handled. If you own a business with others, a North Carolina buy-sell agreements lawyer can help you memorialize the owners’ exit strategy.
Imagine two partners who have built a business from the ground up over many years. They are successful and respected. However, one of them becomes embroiled in a messy divorce. North Carolina is an equitable distribution state, which means the judge can fairly divide marital property. If one spouse was the founder of a business and the other spouse was a stay-at-home parent, there is a chance the judge will award a portion of the business to the stay-at-home spouse.
Now the two partners have an unintentional third, a disgruntled ex with no business experience. With help from an experienced North Carolina lawyer, a buy-sell agreement can circumvent this disaster if a divorce is a triggering event. Once these events occur, the buy-sell agreement spells out who can buy out whom and at what price. Triggering events can include:
Triggering events are not universal to all business, and owners can decide on which scenarios to include in their plan. A savvy attorney should be involved in drafting a buy-sell agreement for North Carolina business owners.
If the company purchases the stake of a departing owner, the terms are memorialized in a redemption buy-sell agreement. If other owners buy one departing owner out, it is called a cross-purchase agreement. A local business attorney can draft the appropriate contract depending on the deal’s structure.
Although having a buy-sell agreement is a good idea for any business, fixing a price so early in the company’s run may not be in everyone’s best interest. Businesses grow and what they are worth in the beginning is probably far less than what they are worth years later. A local buy-sell agreements attorney could remedy this with a covenant to adjust the valuation at regular intervals. However, this can be time-consuming if the business is diverse and its financials complicated.
Instead of regular reevaluations, companies with more complicated financial practices can hire a forensic accountant or professional appraiser when an owner departs. The Chief Financial Officer could also figure value with a neutral formula employing the company’s book value with adjustments or an earnings multiple. If owners cannot agree on a price, they may conduct a silent auction amongst themselves, with the highest bidder taking the departing owner’s share.
The potential downsides of buy-sell agreements can usually be resolved. For instance, if an owner triggers a sellout because of a divorce, the judge may be willing to substitute other marital property and leave the business asset with the spouse-owner. If committing a felony is a triggering event, the buy-sell agreement can stipulate that only a conviction will trigger the buyout.
These agreements help defuse arguments, including among family members in a business who may also use buy-sell agreements to circumvent estate taxes. Everyone subject to these agreements is treated equally because all owners must agree on the terms for a buyout.
You have a vested interest in your company, including what happens to it when an owner departs. Get the legal assistance you need to secure your business’s future success. At Sparks Law, our North Carolina buy-sell agreements lawyers are here to discuss your goals and put contracts in place to achieve them. Call us today for a consultation.