What Happens When You Don’t Have a Buy-Sell Agreement?
One of the most difficult situations for small business owners is the “business divorce,” where the owners no longer want to be in business together. Often, there is an agreement that sets out a process and price for an owner to be bought out. It may be called a Shareholder Agreement, an Operating Agreement, a Partnership Agreement or a Buy-Sell Agreement. Without one, it can be very difficult to force out an owner or to get paid for your part of the business.
The main remedy is to ask for a court to dissolve the company, pay off the creditors, and split the proceeds based on percentage of ownership. In some cases, a minority owner may have grounds for a lawsuit for “minority oppression," but this can be costly and time-consuming. The better option is to draft an agreement up front that lists events that could or must trigger a purchase of one owner’s interest. These events often include death, disability, divorce, bankruptcy or incompetency. Death and disability should be funded with insurance, so there is money to pay the owner or his/her estate. In addition, a good agreement should have a provision for one owner to buy out another (or groups of owners) if there is a deadlock in management or an owner wants to leave the business for personal reasons.