Written by Haans Mulder, JD, MBA, MST, CFP®
If you have one or more owners of your family business, a buy-sell agreement is critical for the longevity and stability of your company. These types of agreements address what happens if certain events occur during you or your business partner’s life. For example, if you unexpectedly pass away, does the company have an obligation to buy back the stock or LLC interest from your spouse or heirs? If not, what will your spouse have to rely on for his or her financial needs? Also, will your spouse or heirs have to go through probate as a part of the buy-out process? Finally, how is the stock or LLC interest valued for your buy-out?
I find many business owners who own stock in a corporation don’t have a buy-sell or shareholder agreement. Also, owners of limited liability companies typically have this type of agreement (which is known as an “operating agreement”), but it’s usually out of date. Here’s what I mean. You likely setup your LLC at a time when a lot was going on and you didn’t have much time to look over a complicated legal document. Five or 10 years have passed, your company is doing well, but the operating agreement probably hasn’t kept up with the growth of your company.
As an example, the agreement may have a provision valuing your LLC interest at “book value.” While this can be appropriate for some companies, these provisions in some cases dramatically undervalue an LLC interest. This could create a severe financial hardship if your spouse received much less than he or she should have and especially late in life.
If you’re interested having a buy-sell agreement drafted or reviewed to determine if it’s still current with the growth of your company, feel free to reach out to me.