San Diego Buy-Sell Agreements: Checklist of Discussion Points

A buy-sell agreement is essential for small San Diego closely-held corporations. Sometimes a buy-sell agreement is a stand-alone document; often the buy-sell provisions are part of a larger Owners Agreement that sets out the various duties, obligations, and restrictions related to ownership and management of the company. However, whether stand-alone or part of a larger agreement, it is important to seek the advice and guidance of an experienced San Diego corporate attorney when considering what needs to be in a buy-sell agreement. The buy-sell provisions must address and cover all the critical business concerns of all the owners including those with a majority stake and those with minority investments. This article provides an overview of the discussion points that the parties will want to consider.

Triggering Events

How and when the buy-sell agreement is triggered is a crucial discussion point. If the company has majority owners and minority investors, everyone must discuss and come to an agreement on several issues including:

• Can the majority owners require a buy-out of the minority interest?
• What circumstances can trigger the buy-out? Possible circumstances include cause, no-cause, the mere passage of time, targeted to certain business achievements, or failure to reach certain benchmarks, etc.
• Can the minority investors force a buy-out and under what circumstances?
• Timing of a required or forced buy-out?
• Can the buy-out be triggered by “bad behavior” and how is “bad behavior” defined?
• And more

Sometimes the concerns are not majority-vs-minority investor issues but are concerns about ownership, company culture, and control. Thus, the triggering events might be the death of one of the main owners, a divorce, or a bankruptcy that might see a new owner foisted upon the company by operation of law. That is, upon death, the surviving spouse or other heirs end up owning part of the company. That might not be acceptable. Similarly, in a divorce proceeding, the non-active spouse might be given the ownership interest in the company via the judgment of divorce. Again, that might not be acceptable to the other owners. These are issues that fall under the question of “triggering events.”

Payout

How the buy-out is paid is also a crucial discussion point. Valuation methodologies should be fully explored and agreed upon. Discussion points here include:

• Methodology
• Who conducts the valuation?
• Discounts allowed/prohibited
• Access to business records
• Any sort of “look-back” mechanism to enhance payment to the exiting owner
• Length of time for a “look-back”
• And more

Dispute Mechanisms

One of the most important functions of a buy-sell agreement is to avoid litigation. Lawsuits and the attendant legal expenses can multiply quickly. Tens of thousands of dollars can be spent very quickly. All the owners have an interest in avoiding those costs — thus, the need for the buy-sell agreement and also the need to agree on a dispute mechanism. These include arbitration, mediation, expert determination, and other mechanisms.

Timetable for Payment

The timetable for the payout should be explored and agreed upon. Timing is often a key problem to resolve since there is a clear conflict. The exiting owners want immediate and full payment while, often, the remaining owners need time to accumulate the payout price. Several issues here include upfront lump sum payments, the period of any remaining payments, how periodic payments are calculated, interest, collateral, default provisions, the ability and/or required use of financing and more.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters and proudly serves business owners and residents in San Diego and in the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard. Like us on Facebook.

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