When you are a partner in a business, you expect all owners to benefit the company with their expertise. You are partners because of your individual strengths. However, the company could be in jeopardy if one partner leaves or passes away and you have no say in their replacement.
As such, it is crucial to plan for what will happen when partners exit the company. An experienced attorney at Sparks Law could help draft a document that outlines how the company and other stakeholders should purchase a departing stakeholder’s investment. If you own a business with one or more partners, reach out to a Texas buy-sell agreements lawyer today.
The worst scenario involving a departing owner is termination for cause. This means that an owner is forced out because their actions are harming the company. Dereliction of duty should be a triggering event to force out a poorly performing partner, but it is not the only triggering event that should be included in a buy-sell agreement.
A knowledgeable Texas attorney could draft a buy-sell agreement that includes solutions discussed and deemed fair by all owners. This puts protocols in place for when a triggering event occurs, which can help head off misunderstandings, fights, and litigation. Stakeholders should agree about what is fair to all when it comes to partners selling their stake.
Triggering events are personal circumstances that befall an owner and allow the company or other owners to buy the owner out. Along with a partner’s firing, triggering events could include:
Other triggering events may apply. A reputable attorney at our Texas office can discuss how buy-sell agreements work in a client’s best interest.
Owners should discuss how they would like their shares to be treated if they wish to sell or are subject to a triggering event. The right of first refusal would give the company or other owners the right to purchase the shares after a triggering event.
Owners can discuss whether they should have the right to sell their shares on the open market, which is common when many people own the shares, such as with corporations that trade publicly on a stock exchange. The problem with this stance for a business owned by two or several people is the impact the sale will have on a business. A local attorney can explain why a buy-sell agreement is critical for a closely held corporation, limited liability company, or partnership.
The company and its owners can finance a buyout by purchasing insurance. A stock redemption clause spells out how a company can purchase policies on each owner and redeem the policy when an owner dies or becomes disabled. A cross-purchase involves each owner purchasing insurance on the other owners, cashing the insurance in to acquire a disabled or dead owner’s shares.
A buy-sell agreement must include either the purchase price or a valuation method. The purchase price early in the business’s life will likely not be a fair price years later after the business grows. Owners can either regularly revisit what the business is worth, use an earnings multiplier, or consult a business valuation expert when a triggering event occurs.
A dedicated buy-sell agreements attorney could help memorialize other issues in the document. Owners selling their shares to explore other employment options should be subject to non-compete and confidentiality restrictions.
Do not wait until a crisis arises to plan for your company’s future. You should discuss and memorialize what should happen to the business interests held by each owner should they leave the company or pass away.
At Sparks Law, our Texas buy-sell agreements lawyers could provide the contracts you need to oversee an orderly ownership transition. Call our office today for your initial consultation.
