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Yemelyan Rybakov
Yemelyan Rybakov

Buy Sell Agreement California

One of the best ways to prepare for change, both expected and unexpected, is to sign a buy sell agreement with the other partners. Below are answers to some of the most commonly asked questions about buy sell agreements.

buy sell agreement california

Almost every business that is owned by more than one party (co-owned) should have a buy sell agreement (also called a buyout agreement) in place at the moment the business is formed or as soon as possible after that point. Each day that a business continues to operate without a buy sell agreement increases the financial risk.

Despite its simple name, no, buy sell agreements generally have very little to do with the buying and selling of businesses. Instead, buy sell agreements are contracts that link co-owners of businesses together and controls when owners can sell their respective interests in a company or business. In addition, these agreements dictate who can buy an owner's interest in a company and also sets the price at which the interest will be sold.

Buy sell agreements only come into force when an owner of a business dies, retires, is bankrupted, becomes disabled or is divorced. Likening a buy sell agreement to a prenuptial agreement is a valid comparison -- they govern when a co-owner is getting out of the business just like when a couple is getting out of a marriage. Buy sell agreements generally cover only transactions that occur between the business owners, which is why they are sometimes referred to merely as buyout agreements.

Because of these laws, a good buy sell agreement will adopt provisions that prevent former spouses from taking an ownership interest in the company on divorce from a co-owner. The agreements do this by requiring any former spouse that gets a property interest through divorce to sell that property interest back to the company or to other co-owners in exchange for cash or other valuable property.

If the controlling buy sell agreement is not carefully drafted, then yes, a personal bankruptcy could impact a business. If a co-owner does not have enough assets to cover his bankruptcy, the bankruptcy trustee may liquidate the company and use the profits to satisfy the bankrupt co-owners debts. Because of this risk, most buy sell agreements contain clauses that deal with such situations.

Typically, if a co-owner is about to file for bankruptcy, he must inform all the other co-owners of his situation. This then is treated as an offer to sell his ownership interest in the company back to the other owners. The money that is paid in this buyout goes towards the co-owners bankruptcy case.

Perhaps the most accurate way of determining the value of a company when a co-owner is being bought out is to hire an appraiser at the time of sale. The appraiser will need to see at least one year of business records to make his decision. However, when a buy sell agreement allows this to happen, what often results is that many owners hire their own assessors that all come up with different valuation formulas.

To avoid this problem, it is often best to adopt a valuation formula that will go into the wording of the buy sell agreement. By doing so at the outset, this allows all the owners of the business to discuss and come up with an agreed upon valuation formula. If a formula is already set when it comes time to buyout an owner, it can save a lot of time and effort that would otherwise be wasted in picking and choosing between competing valuation formulas.

This often happens when a buy sell agreement requires that an immediate, 100% lump sum be paid to an owner when it comes time for sale. Instead, it is often worthwhile to draft a more flexible payment scheme into the buy sell agreement. Instead of requiring a 100% lump sum, instead allow a down payment on buyout between 25 and 35% of the value of the ownership interest up front with installment payments coming after for a period of three to five years.

Yes. By carefully drafting a buy sell agreement, you may be able to avoid or reduce any potential estate taxes that you may owe at your death. For example, if you plan on passing your ownership interest to a family member at your death, you may be able to avoid the estate tax entirely. In addition, if you adopt a valuation formula inside of the buy sell agreement that gives the value of your ownership interest that is lower than the actual value, you could reduce any estate tax liability at the time of your death. If you are interested in using a buy sell agreement to lessen or avoid any estate taxes, you should consult with an experienced tax attorney to find out your best options.

It certainly doesn't hurt to have an attorney help you draft -- or at least review -- a buy sell agreement before the parties sign on. In fact, sometimes an ounce of prevention is worth much more than a pound of cure. Even if you are absolutely confident about the terms of your buy sell agreement, it may still be a good idea to have a lawyer take a look at it. Check FindLaw's lawyer directory to find a business organizations attorney near you.

A shareholder buy-sell agreement is also commonly referred to as a shareholder agreement and a shareholder buy-out agreement. If your California corporation will be owned by more than one individual (excluding a husband and wife and domestic partners) having a Shareholder Buy-Sell Agreement is crucial, but often put off until it is too late. Have you considered what will, or should, happen if you want to force a shareholder out, or if a shareholder just wants out? How much is that shareholder's interest worth and how will it get paid? The reality is, no one wants to engage in this type of discussion especially when all of the shareholders resources are being used to finance the business. But this can be a very costly mistake since 85% of all business relationships fail primarily because of disputes on how to run the business, but also because of factors beyond the business owner's control (e.g. death, disability, divorce, personal bankruptcy, etc.). By having an attorney prepare a shareholder buy-sell agreement with a predetermined valuation method for the business, the owners of a small, privately held corporation can: (1) protect the value of their business interest for their heirs; (2) protect the business from interference from third parties (ex-spouses, creditors, and the beneficiaries of a deceased owner); and (3) provide an orderly means to divide the business if a shareholder wants to be bought out, is being forced out, or worse, becomes disabled, dies, files for bankruptcy, or gets divorced. This is why many banks will often require a privately held corporation to have a buy-sell agreement before it will issue a loan, and why many bonding companies will insist a contractor have a shareholder buy-sell agreement in place before agreeing to provide bonding for a construction job.

Simply put, a shareholder buy-sell agreement is a binding contract between the shareholders (owners) of the corporation that sets forth (while everyone is getting along and willing to be fair) the terms and conditions of a future sale of their interest in the corporation if a triggering event occurs. A shareholder buy-sell agreement will typically set forth: 1) what events will trigger a buyout (e.g. death, disability, bankruptcy, divorce, retirement, etc.); 2) the price that will be paid for the shareholder's interest in the business, which may vary depending on the type of triggering event; and 3) who can buy an owner's interest in the business (e.g. outside third parties, just other shareholders, or just the corporation itself). In the absence of a shareholder buy-sell agreement, each shareholder of a corporation will typically spend tens of thousands of dollars on having their own business valuation prepared and litigating each other in court.

First, when there is no written shareholder buy-sell agreement is in place, the chance of being forced to litigate is greatly increased. Cha Ching for us lawyers and forensic accountants. Shareholder disputes often wind up costing, on average, over $50,000 to resolve because the experts alone that are needed to testify about the value of the corporation often charge over $20,000 to perform a forensic evaluation of the business. To make matters even worse, if the dispute is not resolved before trial, the outcome may be quite different than what the shareholders of the corporation would probably want, or expect, to happen.

Absent a written shareholder buy-sell agreement with provisions to the contrary, California law provides that the deceased shareholder's heirs will step into that shareholder's place. In essence, this means that the surviving shareholders could be forced to operate the business with the deceased shareholder's spouse, children, other relative, or friend. However, a well written shareholder buy-sell agreement can change this default by providing a formula to will value deceased owner's interest in the business and a means to pay out that interest to the deceased owner's estate either in a lump sum payment, or over a period of time.

California law provides that absent a written shareholder buy-sell agreement, if a shareholder becomes disabled, the disabled shareholder still retains his or her shares and profit participation as if nothing had occurred. This means that despite not having any participation from the disabled shareholder, the disabled shareholder will still be entitled to his or her share of the profits. To avoid this prospect, a shareholder buy-sell agreement will typically first provide a definition of what constitutes being disabled, and then will provide a mutually agreeable solution that will fairly compensate the disabled shareholder, but more effectively enable the business to continue operating.

The above is just a small sampling of what can occur when a corporation fails to execute a shareholder buy-sell agreement. Nevertheless, most California corporations fail to prepare and execute a shareholder buy-sell agreement because attorneys typically charge $2,500+ for a shareholder buy-sell agreement. However, my years of experience has enabled me to provide you with a customized shareholder buy-sell agreement for about $750 depending on how complicated the individual shareholders want to make it. The key to a successful buy-sell agreement is providing mutually agreeable buy-out terms (which may vary based on the situation) that will ensure a quick, reasonable, and mutually agreed upon payment without the hassle and expense of going to court, paying multiple appraisers, and paying exorbitant legal fees. Different purchase prices may be assigned to different transfer events and the corporation can set the value of the business on a yearly basis when the corporation's tax return is prepared and filed. For instance, in the event the owners mutually agree someone has to go, the purchase price might be equal to 100 percent, but in the case of a buyout due to an owner just wanting out, it may only be 80 percent of the established value. 041b061a72


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