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Using a buy-sell agreement to control company ownership

On Behalf of | Feb 15, 2024 | Commercial Litigation |

Business disputes sometimes involve selling the ownership interest of a business partner to another person. In some cases, the other partners of the company might not want the potential successor to join the business. These and other related disputes are why a solid buy-sell agreement is often necessary.

In the event your business becomes embroiled in a dispute over selling partner ownership, one or more provisions in a buy-sell agreement can establish the legal basis for denying a possible succession and controlling the outcome of an interest sale.

Rule out undesired successors

A major benefit of a buy-sell document is that partners can specify who has an entitlement to their ownership share. This prevents ownership from automatically going to a spouse or an adult child in the event a partner dies. Moreover, the buy-sell can explicitly bar some individuals from receiving an interest in the business. This helps keep certain individuals and even other businesses out of your company.

Address partner bankruptcies

Sometimes a business partner encounters personal financial problems and files for bankruptcy. The partner might not be looking to sell off his or her share, but a bankruptcy trustee might decide the ownership of the business is fair game and liquidate it to satisfy the debts of the partner.

Buy-sell agreements can address this situation by treating the bankruptcy filing as an automatic offer to sell the ownership interest to the other partners. This prevents the business from becoming entangled in the bankruptcy case.

Stagger payments

Buying out another partner can become a problem if the buy-sell requires a complete lump sum payment of the entire interest. If this amount is more than the other partners can afford, it could throw the succession to someone else. This is why some buy-sell agreements include a payment method that allows the other partners to pay in installments over a course of a few years.

Buy-sell agreements can address other issues, such as establishing a fair value price for ownership interest. Once established, a buy-sell document should act as an effective shield against legal problems that might arise in a business succession.