How can a buy-sell agreement protect California business owners?

Business owners may need to sell or dissolve their companies for any number of reasons: retirement, divorce, disability, bankruptcy, disputes with partners, or just the desire to do something different. Whatever the reason may be, you'll need to cover your legal bases if you intend to sell all or part of your business.

If you and a co-owner own the business, then one of those legal bases should be a buy-sell agreement. This kind of binding contract clarifies, among other things, when interest in the company can be sold, what the price will be, and who can buy. An agreement controlling ownership rights should be created prior to the formation of a business or as soon as possible after a business is formed.

One issue that comes up in many buyouts is dispute over the valuation of the business. With an effective buy-sell agreement, multiple owners can decide beforehand how the business should be valuated in the event of a buyout. Defusing this kind of conflict early on can eventually prove beneficial for all parties involved.

A buy-sell agreement can also clarify what to do if one owner encounters financial trouble and has to file for personal bankruptcy. The operation of a company could be put at risk if a bankruptcy trustee decides to liquidate business assets, and a buyout agreement can include terms that require any co-owner going through bankruptcy to sell his or her interest to the other partners.

Divorce is another personal matter that can be addressed in a buyout agreement. In California, the ex-spouse of a co-owner may seek partial ownership of a business, but a well written buy-sell agreement can address this matter and require the ex-spouse to sell to the other owners in the event that interest in the business is awarded to the ex-spouse as part of a divorce settlement.

Other issues that can be addressed in a buy-sell agreement include the following:

  • Dispute resolution guidelines
  • Rights of first refusal
  • Non-compete provisions
  • Shareholders' voting rights
  • Co-owner responsibilities

To learn more about business contracts, please explore the business law website of Shulman, Hodges & Bastian LLP.

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