What is a Buy/Sell Agreement?
You may think that your business partnership will last forever, but just like marriage – divorce can happen even with the best of intentions. So a buy/sell agreement is a way to decide before entering into an LLC with other parties how you will handle it if one or more members decide to leave the LLC and/or sell their interest to a third party.
The reality is that if you do agree to a process and put it in writing in your LLC operating agreement, members are free to do whatever they please. Therefore, you need to include a buyout or buy/sell agreement clause in or along with your operating agreement that covers how the LLC will handle issues like:
- What to do when a member wants out – who can buy their shares or perhaps is forced to?
- What price is put on each member’s interest in the LLC?
- Can outsiders buy a leaving members share?
- Are there any events that should and will trigger a buyout?
This is, in a way, like a prenuptial that some couples enter into before marriage and provides those entering into an LLC the same kind of protection in the even the LLC splits up.
What Does a Buy/Sell Agreement Actually Cover?
This will be up to your specific LLC’s needs and is something you should discuss with your business attorney, but most buyout or buy/sell agreements stipulate when buyout can occur. Typical buyout events are:
- The retirement or resignation of any of the members of the LLC
- Receiving a buyout offer that is attractive enough to warrant taking it
- If one or more members declares bankruptcy
- A situation where the personal relationship between members is dissolved (like a divorce).
- The death or disability of any LLC co-owners.
- A foreclosure on any debt secured by any of the LLC members
Why Your LLC Needs a Buyout Agreement
No one ever starts a business they will be in forever. This just isn’t how business or life works. Every business you enter into you will one day leave. So starting to think about how you get out at the beginning is actually very important to do and one of the key tasks of your buyout agreement.
The fact is no matter how secure you think your plans are, things change. It might seem all co-owners will be in your LLC for the next twenty years only to find out something has changed drastically and one needs out in just 2 – 3 years. When this happens, you need to have a plan ready or your business will suffer. Simply put, without putting into writing an agreement between co-owners in an LLC, there is nothing to prevent one or more of them from leaving the rest of the LLC members in the lurch. The fallout from this can even run a business into the ground.
Additionally, you never know when the addition of a new member to the LLC will be needed, so having the process agreed upon ahead of time between all members and put into writing in a buy/sell agreement is a great way to make sure that your LLC can take advantage of opportunities that arise without causing turmoil or disrupting distribution or voting rights. Without a provision stating you must approve anyone who buys in, you may find that you have a co-owner you’d rather not have if a previous member sells their shares to them.
Sitting down with all members and even your attorney to outline the needs and desires of all involved so that a compromise can be reached concerning how these issues will play out when and if they occur is a key piece to protecting your LLC in the event of a buyout.
Still Have Questions?
When it comes down to it, you buyout agreement may end up simply being several clauses within your operating agreement, or you may find that you need a separate document all together because the individual arrangements of your business require it. The best way to assess your buy-out agreement needs is to find a qualified and experienced small business attorney like Yoel Molina who can provide answers to your questions and guidance as you draft not just your buyout agreement, but your entire LLC operating agreement and documents.
If you are considering incorporating or becoming and LLC and would like some sound legal advice from someone who knows the law and the concerns of small and medium sized business owners in Florida, look no further than the Law Offices of Yoel Molina. With years of experiences helping businesses owners throughout the state achieve peace of mind by finding the right protection for their personal assets, Yoel has the understanding, insight, and legal expertise needed to do the same for you. So give our office a call, we’d be glad to discuss your legal business needs and concerns.