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 fairly. Create a buy-sell agreement that effectively addresses your business’ unique needs.