Companies Without Buy-Sell Agreements

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Companies Without Buy-Sell Agreements

A Company without Buy-Sell Agreements

At Seikaly, Stewart & Bennett, our business formation lawyers always advise clients not put a business together until you know how you’re going to take it apart. Having litigated the dissolution of businesses, we know that taking your business apart in court is akin to doing brain surgery with a chainsaw. Consequently, when putting a business together, we focus heavily on how the business can come apart in an orderly and fair manner.

Much like the issues relating to majority versus minority control questions, buy-sell agreements stating how interests in a business will be bought, sold, inherited, or mortgaged, are much easier to make in advance. The owners need to decide in advance how ownership can and cannot pass. One common provision is to provide that no owner can sell his or her interest in the business to a stranger without having first offered it to the existing owners for the same price.

The death of an owner can produce a situation where a spouse or the deceased owner’s children become owners in the business, regardless of whether they know how to make a valid contribution. The best way to prevent this problem is to have provisions in buy-sell agreements indicating that if an owner dies, the business or the remaining shareholders have the right to buy the deceased partner’s share at a predetermined price.  The disability of an owner should be dealt with in advance as well. An owner who is no longer in a position to make contributions to the business needs to be bought out just as surely as a partner who has died. Insurance can play a role here by providing, for example, generous disability payments in exchange for sale back to the company of the owner’s shares. If the company has a lot of residual value, the disability payments may be enhanced by additional payments, in a lump or over time, representing additional equity that the owner had in the business.

The disability of an owner should be dealt with in advance as well. An owner who is no longer in a position to make contributions to the business needs to be bought out just as surely as a partner who has died. Insurance can play a role here by providing, for example, generous disability payments in exchange for sale back to the company of the owner’s shares. If the company has a lot of residual value, the disability payments may be enhanced by additional payments, in a lump or over time, representing additional equity that the owner had in the business.

Here at Seikaly, Stewart, and Bennett, our Michigan business formation attorneys can help establish buy-sell agreements for your business. Contact us today for a free consultation.

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