A majority of businesses have ownership groups of less than
five individuals. While this provides for efficient and
effective management, difficulties arise when something
happens to one of the owners.
If your business has multiple owners, ask yourself what
happens if:
The owners can’t get along?
One of you is hospitalized for an extended period?
An owner gets divorced [and the spouse is awarded half the
shares?]
An owner stops coming to work?
You want to sell stock to a third party?
An owner passes away?
One of you wants to retire?
Each of these events can severely disrupt your business,
particularly ownership disputes. If the owners can’t agree
to a course of action, they often end up in court and a
judge may get involved in the actual running of the
business. Many businesses that were otherwise successful
have failed because of such disputes.
How can you avoid these problems?
The best solution is to pursue an agreement between the
parties before there are problems. This agreement, sometimes
called a buy-sell agreement, is a contract between the
owners [and their spouses, if any]. The purpose of the
document is to address how disputes, ownership sales and
other events will be addressed before they happen. These
issues are much easier to deal when emotions are not
involved.
The most common issues addressed in the ownership agreement
are when and how equity interest will be bought back by the
business or other owners. Common topics include:
First Right of Refusal if a shareholder tries to sell
their stock;
Right of owners to buy the stock from the estate of a
deceased owner to avoid ownership by the children or spouse
of the deceased owner. This is often combined with life
insurance products to supply a means for making payment;
Right to buy back stock from an owner that files personal
bankruptcy;
Right to buy back stock from an owner that is found to be
mentally incompetent [drug addictions, etc.];
Right to buy back stock from an owner that fails to
perform their assigned duties; and
A buy-sell agreement is a smart and effective means of
short-circuiting ownership disputes before they occur. If
your corporation consists of two or more owners, you should
seriously consider putting an agreement in writing to avoid
debilitating disputes.
Richard Chapo is the lead attorney for the law firm
– a firm providing
legal advice to California businesses. This article is for
general education purposes and does not address every facet
of the subject matter. Nothing in this article creates an
attorney-client relationship.
