Imagine -- you’ve just tied the knot with your life partner, and you couldn’t be happier. As you and your spouse step on an airplane to the Bahamas, the word “prenup” is far from your mind. You are in the honey-moon phase, and the last thing you want to do is plan for the divorce you believe will never happen. 

When you start a business with a trusted partner, you may be in a similar state of bliss. Excited to get things up and running with their help, the last thing you are thinking about is a “business partner separation.” However, things can get complicated if you haven’t planned a course of action for the end of a business partnership 

Just as a good prenup prevents unnecessary conflict during divorce, a buy-sell agreement can help you prevent unsavory outcomes during a business partner. Even if you are your business partner are still in the honey-moon phase, you should have an attorney help you draft up a buy-sell agreement as soon as possible. He or she can help you consider the inclusion of the following:  

  • A Restriction on Transfer 

 A restriction on transfer sets conditions which dictate if and when an original shareholder can sell his/her shares to third-parties. This can prevent outsiders from gaining an unwanted amount of control within the company. You may want to restrict the transfer of shares in different manners for each type of separation or “trigger event” – an attorney can help you determine how best to restrict the transfer for each. 

  • Forced Buy-out  

A forced buy-out requires the company to purchase the leaving member’s interest at a pre-determined price or at a price determined by an agreed-upon formula. Typically, a forced buy-out is included in a buy-sell agreement to address the case of a partner’s death.  

  • Right of First Refusal (ROFR) 

A ROFR lists the procedures the leaving business partner must follow when attempting to sell his/her shares. Unlike a forced buy-out, a ROFR does not require the company to buy the seller’s shares. Instead, it gives the company the option to do so before the partner sells his/her shares to a third party. A ROFR is often used to restrict the transfer of shares when a business partner is terminated or leaving the company of his own free will.  

  • Minority Shareholders’ Rights  

Many states have statutes requiring majority shareholders to honor the reasonable expectations of minority shareholders. In order to benefit both majority and minority shareholders, you might want to consider addressing “tag-along” and “drag-along” rights in your buy-sell agreement. “Tag-along” rights give minority shareholders the ability to force sell their shares at the same price as those being sold by a majority shareholder. “Drag-along” rights mandate the sale of all the company’s stocks (even the minority shareholder’s) if a buyer’s purchase is contingent on the acquisition of all the company’s shares.  

Don’t let your business start-up bliss keep you from drafting a “business prenup.” You can never be sure what life holds, and if a business partnership must come to an end, a buy-sell agreement will ensure that the resulting circumstances are handled efficiently and fairlyCreate a buy-sell agreement that effectively addresses your business’ unique needs. 

Click below to contact Goosmann Law Firm with any questions from the above. You can continue to follow The Deal Maker blog here.

CONTACT US

DISCLAIMER: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. By visiting this website, blog, or post you understand that there is no attorney client relationship between you and the Goosmann Law Firm attorneys and website publisher. No information contained in this post should be construed as legal advice from Goosmann Law Firm, PLC, or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.

Subscribe Our Blog

DISCLAIMER: The information in this blog post (“post”) is provided for general informational purposes only, and may not reflect the current law in your jurisdiction. By visiting this website, blog, or post you understand that there is no attorney client relationship between you and the Goosmann Law Firm attorneys and website publisher. No information contained in this post should be construed as legal advice from Goosmann Law Firm, PLC, or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this Post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.