What are the ingredients of an effective buy-sell agreement in San Diego or for a company anywhere in California?  Buy sell agreements are one of the most important documents for any small business, closely-held company, professional or medical practice, or LLC.  The buy sell agreement should be a component of the operating agreement in an LLC, or the corporate documents in a closely-held company. This is one of the most essential business contracts you or your business partners ever sign, and it is important to make sure this essential document is well-crafted at the outset of your company and regularly updated during the life of any small company.

3 Important Takeaways Regarding an Effective Buy-Sell Agreement in San Diego or Anywhere in California:

• The buy-sell agreement is a contract between the owners of a company, and how an ownership share can or will be managed in the event of one of the “triggers” in the life of an owner or investor.
• A trigger can include the death of a partner, injury preventing work, incapacitation, bankruptcy, divorce, or the inability to contribute needed capital per the corporate documents.
• Without a well-crafted buy-sell agreement, minority owners are more at risk, and the family members or survivors of the affected partner may not receive fair compensation for their ownership stake.

What Is a Buy-Sell Agreement?

An effective buy-sell agreement in San Diego and throughout California documents the intention of the partners, shareholders, or members in any small company or LLC while protecting the short and long-term viability of the company in the event of an unexpected development including, but not limited to:

• The inability of a partner to make a required capital contribution
• The death of a partner
• Serious injury or incapacitation
• Divorce
• Personal bankruptcy of a partner or member

These events are often referred to as “triggers” in that they trigger specific legal steps when one of the identified events occurs.

The Problem with Generic Buy-Sell Agreements

Many generic forms on download sites use boilerplate language, much of which may not reflect the unique laws of the State of California, let alone the best interests of the partnership.  The experienced business formation and partnership attorneys at the Watkins Firm guide you and your business partners through crucial conversations at the outset of the business, when everyone is pulling together and looking out for the best interests of the new enterprise.  Our proven buy-sell agreements provide income for the estate or trust of a partner facing a life challenge while protecting other partners and members as well as the company itself from outside influences, unwanted (beneficiary/spouse) partners or partnership disputes down the road.

How is an Effective Buy-Sell Agreement Structured?

Usually this document will define how a stakeholder’s interest is to be valued, and the specific triggers which open the door to a process which allows an owner or group of fellow owners to buy out the exiting stakeholder’s interest, a “put right” for a selling partner to force the other stakeholders in the company to buy out their interest, or a mutual obligation all members of the partnership to assist in the sale of a partner’s interest.  Who has the first right to acquire the ownership interest?  Will the company have the opportunity to buy back an owner’s share(s) if a buy-sell trigger occurs?

Pro-Tip: “Once we’ve selected the entity,  the biggest mistake that people make, especially at the outset, is they don’t pay attention to the corporate documents. They don’t pay attention to the LLCs operating agreement. They don’t pay attention to the shareholders’ agreement.  They don’t pay attention to the buy-sell agreement.

And they take some boilerplate default and then down the road they get into the sauce and they’re making some money and there’s real issues that would’ve been easy to address back at the beginning. 

So let’s talk about the relationships between people. If you have a company, and let’s say there’s three or five people that are members in this LLC, life happens, unfortunately, people die, they become incapacitated, they get divorced, they file personal bankruptcy. So why is it important to address what happens in those events upfront in a carefully crafted buy-sell agreement in this case?

Because it doesn’t cost that much money and we already have them on file. And not only do we automatically do it for you, we go through it and we go through it with the areas that are important for you to think about and to know and make choices on and an explanation. And so when this happens, which you never think it could happen, you’ll remember that, oh yeah, we do have a clause for what happens to Uncle Joe can’t participate anymore.

And it’s in there and it’s a long document, but it’s in there, it’s there for you. It’s a framework and it gives you guidance on what are the steps you should take? How are we going to value that person’s interest?  Who gets the first shot at buying them out? A lot of what ifs. And you can’t account for every possible what if on the planet, but there are 99% of the what ifs you may come across in your life that can be covered by your standard corporate documents and the buy-sell agreement.

And if I don’t cover them up front, and now you’re three years down the road and making money, and there are 5 of you, and you’re rocking at it and boom, something happens. What’s the cost? What happens when the wheels come off if you don’t address it up front?

 If there’s a lot of money, there’s a lot of fights. And what do they say in the military? … failure to plan is a plan to fail.  This is automatic. We make you go through these things. We improve your knowledge of how these important documents work, and so when you’re having everyday discussions with people you do it with less stress and you’re prepared for a lot more than you would be had you just tried to form it yourself,

And when businesses are starting up, there’s an energy to that, right? There’s an excitement. We’re all pulling the same direction. Those conversations are a lot easier at that point than they are three or five years down the road. And it makes you feel good when you know you planned for a lot of things. Now you can focus on making money and it makes your company worth more money and as you go down the road.” – Dan Watkins, Founding Partner

The Importance of Buy-Sell Agreements in a Small or Closely Held Company in California

It is hard to overstate the importance of an effective buy-sell agreement in a small or closely-held company in California.  The Buy-sell agreement is a critical corporate document and it is important to have your buy-sell agreement and other corporate documents reviewed every year or so to ensure they are kept up to date with changes in the law as well as developments within the business itself.  We invite you to review our podcast Episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today to discuss your unique business interests, and how a carefully-crafted buy-sell agreement by the Watkins Firm can protect you and your business in the months and years to come.