Scarinci Hollenbeck, LLC, LLCScarinci Hollenbeck, LLC, LLC

Firm Insights

A Buy-Sell Agreement Can Help Avoid Costly Legal Disputes

Author: Scarinci Hollenbeck, LLC

Date: October 8, 2019

Key Contacts

Back

To Avoid Various Potential Legal Disputes When Selling One’s Ownership Interest, it is Recommended to Develop a Buy-Sell Agreement

No one wants to think about leaving a business, particularly when it’s just getting started. But you should. Having a plan in place for when a business owner wants to sell his or her stake or when a business dispute arises can mean the difference between having a going concern or a defunct entity, in some circumstances.

A Buy-Sell Agreement Can Help Avoid Costly Legal Disputes

It’s not uncommon for business owners to want to sell their interests, whether they are retiring or simply ready to cash out or there is a difference of opinion between co-owners. However, many startups and other small businesses fail to think ahead, which can lead to disputes over ownership rights, control and finances.

Benefits of a Buy-Sell Agreement

Buy-sell agreements can be stand-alone agreements or be contained within an operating agreement, partnership agreement or stockholders’ agreement.

In basic terms, a buy-sell agreement lays out an exit strategy for the owner-operator of a business. In addition to addressing what happens when an owner-operator wants to leave the business, it can also address a myriad of other events, including what happens when an owner-operator retires, dies, becomes incapacitated, or even gets divorced, or is failing to perform as intended.

When a “triggering event” occurs, the agreement gives the company or certain other owners the right to buy the departing owner’s interest. To help facilitate that process, the agreement details the price and terms of the buyout.

Terms of a Buy-Sell Agreement

While the specific terms of a buyout agreement should be tailored to your business, at minimum, the agreement should address the following issues:

  • Triggering Events: The agreement must set forth the circumstances that will trigger a buyout. In addition to an owner voluntarily leaving the company, other triggering events may include the personal bankruptcy of an owner-operator, the disability, death, or incapacity of a partner, or a divorce settlement in which an owner-operator’s ex-spouse stands to receive a partnership interest in the company.
  • Potential Buyers: The agreement should specify whether the remaining owners have an obligation, or simply the right, to buy out the departing owner.  Similarly, it should also address who can buy the departing partner’s share of the business, i.e. other partners only or third-parties.
  • Valuation: One of the most important and complicated issues to address is how the departing partner’s interest in the partnership will be valued. The agreement should state whether an appraisal will be conducted or whether a specific valuation method will be employed, as well as the appropriate standard and basis of value to apply. The agreement should also specify what financial statements will be used, i.e. the date of the statement and whether it must be audited.
  • Timeline: To avoid disputes regarding how long the valuation and/or appraisal is taking, the agreement may establish reasonable timelines.
  • Terms of payment: If the departing owner will not be paid the purchase price in a lump sum, the buy-sell agreement should set forth the required down payment, installment terms, and any interest due.

Key Takeaway for New Jersey Businesses

Being unprepared for significant changes to your business can often lead to legal headaches. The departure of an owner is no exception. Whether you chose to include buy-sell provisions as part of a written partnership agreement or execute a separate agreement altogether, it is imperative to have a plan in place. For guidance, we recommend consulting with an experienced business attorney.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Jeff Cassin, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Scarinci Hollenbeck, LLC, LLC

Related Posts

See all
How to Conduct a Fair and Legal Employee Termination in 2025 post image

How to Conduct a Fair and Legal Employee Termination in 2025

Ongoing economic uncertainty is forcing many companies to make tough decisions, which includes lowering staff levels. The legal landscape on both the state and federal level also continues to evolve, especially with significant changes to the priorities of the Equal Employment Opportunity Commission (“EEOC”) under the Trump Administration. Terminating an employee is one of the […]

Author: Angela A. Turiano

Link to post with title - "How to Conduct a Fair and Legal Employee Termination in 2025"
Admin Dissolution for Annual Report: What You Need to Know post image

Admin Dissolution for Annual Report: What You Need to Know

While filing annual reports may seem like a nuisance, failing to do so can have significant ramifications. These include fines, reputational harm, and interruption of your business operations. In basic terms, “admin dissolution for annual report” means that a company is dissolved by the government. This happens because it failed to submit its annual report […]

Author: Dan Brecher

Link to post with title - "Admin Dissolution for Annual Report: What You Need to Know"
What Is Antitrust Litigation Law? post image

What Is Antitrust Litigation Law?

Antitrust laws are designed to ensure that businesses compete fairly. There are three federal antitrust laws that businesses must navigate. These include the Sherman Act, the Federal Trade Commission Act, and the Clayton Act. States also have their own antitrust regimes. These may vary from federal regulations. Understanding antitrust litigation helps businesses navigate these complex […]

Author: Robert E. Levy

Link to post with title - "What Is Antitrust Litigation Law?"
Dissolving Your Business: Essential Legal Steps to Protect Your Interests post image

Dissolving Your Business: Essential Legal Steps to Protect Your Interests

If you’re considering closing your business, it’s crucial to understand that simply shutting your doors does not end your legal obligations. Unless you formally dissolve your business, it continues to exist in the eyes of the law—leaving you exposed to ongoing liabilities such as taxes, compliance violations, and potential lawsuits. Dissolving a business can seem […]

Author: Christopher D. Warren

Link to post with title - "Dissolving Your Business: Essential Legal Steps to Protect Your Interests"
The Role of Corporate Restructuring in Mergers & Acquisitions post image

The Role of Corporate Restructuring in Mergers & Acquisitions

Contrary to what many people think, corporate restructuring isn’t all doom and gloom. Revamping a company’s organizational structure, corporate hierarchy, or operations procedures can help keep your business competitive. This is particularly true during challenging times. Corporate restructuring plays a critical role in modern business strategy. It helps companies adapt quickly to market changes. Following […]

Author: Dan Brecher

Link to post with title - "The Role of Corporate Restructuring in Mergers & Acquisitions"
Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public post image

Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public

Cryptocurrency intimidates most people. The reason is straightforward. People fear what they do not understand. When confusion sets in, the common reaction is either to ignore the subject entirely or to mistrust it. For years, that is exactly how most of the public and even many in law enforcement treated cryptocurrency. However, such apprehension changed […]

Author: Bryce S. Robins

Link to post with title - "Crypto Enforcement: A Former Prosecutor’s Warning to Criminals and the Public"

No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.

Sign up to get the latest from our attorneys!

Explore What Matters Most to You.

Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.

Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.

Let`s get in touch!

* The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.

Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!