Why is a buy-sell agreement important during business formation? Why should the owners, members, investors and/or shareholders focus on this and other corporate documents during the start-up of an LLC or Corporation in San Diego or throughout California?
Key Takeaways of Why is a Buy-Sell Agreement Important During Business Formation:
- The buy-sell agreement is an important corporate document when there is more than one owner of an LLC or corporation in California. The higher the number of owners, and the higher the valuation of the company itself, the more important this agreement becomes.
- The buy-sell agreement establishes the process for managing important “triggers” in the life of an owner, and what is to happen to their ownership interest in the event of one of those triggers.
Important from the Outset of Your San Diego Business
There are many important decisions that should be made during the business formation process of a new business start up. One of the most important is the establishment of a buy-sell agreement as part of the corporate documents of your new company. This critical business document is important when there is more than one owner or partner in a business. In fact, the higher the number of owners, members, or shareholders of a company, the more important the buy-sell agreement is during formation, and throughout the life of any business. This important corporate document protects your new company from unforeseeable challenges in lives of its owners down the road, and provides a solution ahead of time for these important, and often unexpected life events.
It’s Not a Matter of If…
When you are starting a new business in San Diego, one usually isn’t thinking of everything that might go wrong, or the challenges that will inevitably arise. After almost four decades of service to the the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California, the business attorneys at the Watkins Firm can tell you “its not a matter of if, its a matter of when.” What will happen in the event of the death of one of the owners, partners, principle shareholders or members? What if one of the ownership group becomes incapacitated due to an accident or health issue? How will ownership interests be protected from outside influences during personal challenges such as a divorce or bankruptcy? What happens if one of the stakeholders is unable to contribute additional resources during a crucial phase of the business or during a “capital call?” These are often referred to as “triggers,” and several questions need to be answered thoroughly and in advance, such as:
- Who has the first right to acquire a given ownership interest?
- Who is second in line, third, and so on?
- How is the value of an ownership interest to be established?
The Importance of a Buy-Sell Agreement During Business Formation in California
Why is a buy-sell agreement important during business formation in California and here in San Diego? It’s the “what if’s” of life. Everything at the start-up is “positive expectations” and “let’s get this thing going.” The buy-sell agreement addresses crucial potential issues when everyone is upbeat, cooperating and working together in the company’s best interests. It provides important “triggers” and a process for developing a fair “valuation” if the need to purchase one of the ownership interests arises. Without an effective buy-sell agreement, these issues become quite contentious and often lead to expensive and time consuming litigation. This distracts the company from its primary business focus and consumes valuable corporate and personal resources and cash flow.
Pro-Tip: ” It’s sort of like issue spotting, and the conversation we might have with a seller during an acquisition: ‘Here are the issues my client found with your business. How do we want to resolve it?’ And so we propose something for all five issues. If they agree to it, we have a deal. If not, they counter and say, ‘this is what we’ll do in part to solve the problem.’ And half the time, these issues we spot are not big enough to stop our buyer, our client from buying. They’ll say, ‘well, you know what? I’ll take the risk to go ahead and buy it. At least I know about it, right?’ So it’s not like litigation where you’re just, ‘I’m right. You’re wrong.’ It’s more like, ‘Hey, these are the issues. You know, the car has a few dents in it, but it’s still got a good engine. Do you want to buy it?’ And you say, ‘yeah, I’ll, I’ll buy it maybe for a little less money.’
This is especially true when you have a poor buy-sell agreement, or when there isn’t one in place at the present time. It’s a crucial business document that ensures the business can survive anything that happens in the life of its owners.
So, bottom line, owning, buying, investing in, and selling or merging a business, there is no perfect business. And a lot of times we’ll have long term clients of ours hesitant to sell the business. Even though they want to retire, they want to move on because they know that their business isn’t quite perfect. There may be some things they did that they think another owner or buyer wouldn’t like, or, or maybe they’re just shy. We solve those problems. We sell over a hundred million dollars in businesses every year. And every single one of them has some issues, some carve outs, some problems. And as buyers counsel, we help address those.
We also help existing owners to evaluate and strengthen the internal buy-sell agreement. And we put in clauses for those and agreements. And as seller’s counsel, we tell the client what to expect. And when the buyer says something about it, we suggest clauses and resolutions. And luckily in the transaction world, we’re able to solve things a lot faster and a lot easier than in the litigation world. So as an an investor, a buyer or a seller, make sure you have the mindset that those people looking around want to buy, or they want to sell, but they’re ready, willing, and able buyers and sellers. So they have a more motivated, more positive attitude when it comes to closing your deal.” – Dan Watkins, Founding Partner
Proven San Diego Start Up Business Attorneys
What is the importance of a buy-sell agreement during business formation? This important corporate document prevents expensive and time-consuming disputes down the road, and ensures that the company will survive and thrive no matter what happens in the personal lives of its owners. It develops a fair mechanism in advance to protect each owner’s interest and the company’s stability while ensuring stakeholders receive a fair and full value for their ownership interest if they must sell.
This is also one of the great advantages of working with the experienced San Diego business formation attorneys at the Watkins Firm. Many entrepreneurs attempt to save a few dollars by downloading corporate forms from some website and then filling in the blanks themselves.
The Watkins Firm has literally helped to establish thousands of Southern California businesses. Our attorneys work with clients to establish a cost-effective start-up package which includes one-on-one guidance and counsel from proven successful business owners and lawyers. This may not add a lot to a start-up budget, but the Watkins Firm’s start-up package provides extensive counsel and custom-tailored documents to help your company to not only get off to a strong start, but to have the firm foundation to achieve short and long-term success.
We invite you to review our podcast Episode 9 – buying or Selling a Business or its Assets as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
