buy-sell agreement handbook, plan ahead for changes in the ownership of your business 2nd (2003)

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But this text is not a substitute for personal- ized advice from a knowledgeable lawyer. If you want the help of a trained professional, consult an attorney licensed to practice in your state. by Attorneys Anthony Mancuso & Bethany K. Laurence 2nd edition Buy-Sell Agreement Handbook Plan Ahead for Changes in the Ownership of Your Business Second Edition MAY 2003 Editor BETHANY K. LAURENCE Illustrations MARI STEIN Book Design TERRI HEARSH Cover Design SUSAN PUTNEY Index NANCY MULVANY Proofreading JOE SADUSKY Printing CONSOLIDATED PRINTERS, INC. Mancuso, Anthony. Buy-sell agreement handbook: plan ahead for changes in the ownership of your business / by Anthony Mancuso & Bethany K. Laurence 2nd ed. p.cm. Rev. ed. of: How to create a buy-sell agreement & control the destiny of your small business. 1st ed. 1999. Includes index. ISBN 0-87337-926-8 1. Sale of business enterprises Law and legislation United States Popular works. I. Laurence, Bethany K., 1968- II. Mancuso, anthony. How to creat a buy-sell agreement & control the destiny of your small business. III. Title. KF1659.Z9M36 2003 346.73'0652 dc21 2003048773 Copyright © 1999 and 2003 by Anthony Mancuso and Nolo. ALL RIGHTS RESERVED. PRINTED IN THE USA. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher and the author. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. For academic sales or textbook adoptions, ask for Academic Sales. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710. Acknowledgments Many people at Nolo Press contributed to this book: Our special thanks to Jake Warner, whose encouragement and guidance helped make this book a reality. Major thanks to Terri Hearsh for her patience and hard work in designing and laying out the book and to Toni Ihara for her colorful cover. Also, sincere thanks go to Mike Mansel for reviewing the funding and insurance chapter and to Walter Gibbons for lending a keen eye to the tax law chapter. Dedication To Jason, who became my husband somewhere in between the second and third drafts, without whose warm support and tireless tolerance I might not have finished this book, and to my mother and father, who continually encourage me to achieve whatever mark I set my sights upon. —BKL About the Authors Tony Mancuso is a California attorney and the author of Nolo’s best-selling corporate law series, including How to Form Your Own California Corporation and Incorporate Your Business. Tony’s recent books include The Corporate Minutes Book and Your Limited Liability Company: An Operating Manual. Tony is a jazz guitarist and a licensed helicopter pilot. Bethany Laurence joined Nolo as a small business editor and author in 1997. She divides her time between editing small business products and developing content for the Nolo website. Beth is the editor of several Nolo products, including Tax Savvy for Small Business, Take Charge of Your Workers’ Compensation Claim and Quicken Lawyer Business software. She received her law degree from the University of California, Hastings College of Law in 1993 and her undergraduate degree from Boston University in 1990 (Phi Beta Kappa, Magna Cum Laude). 1 An Overview of Buy-Sell Agreements A. What Is a Buy-Sell Agreement? 1/3 B. Why Should You Create a Buy-Sell Agreement? 1/4 C. When Should You Create a Buy-Sell Agreement? 1/8 D. How to Use This Book 1/9 2 Limiting the Transfer of Ownership Interests A. Transferring Ownership Interests 2/2 B. Right of First Refusal 2/2 C. Absolute Transfer Restrictions 2/11 3 Providing the Right to Force Buyouts A. Why Provide the Right to Force the Sale of an Ownership Interest? 3/3 B. What If an Owner Wants to Retire or Stop Working? 3/5 C. What If an Owner Becomes Mentally or Physically Disabled? 3/13 D. What If an Owner Dies? 3/18 E. What If an Owner Divorces? 3/26 F. What If an Owner Loses His or Her Professional License? 3/29 G. What If an Owner Files for Personal Bankruptcy? 3/31 H. What If an Owner Defaults on a Personal Loan? 3/33 I. What If an Owner Is Expelled? 3/35 Table of Contents 4 Structuring Buyouts A. Types of Buyout Procedures 4/2 B. How Our “Wait and See” Approach Works 4/5 5 Funding Buyouts A. Cash 5/2 B. Borrowing 5/2 C. Insurance 5/3 6 How to Set the Buyback Price in Your Agreement A. Why Choose a Price in Advance? 6/2 B. What Valuation Methods Are Based On 6/3 C. How Our Valuation Provisions Work 6/5 D. Agreeing on a Fixed Buyout Price (Valuation Method 1) 6/6 E. Buyout Formulas 6/9 7 Choosing Payment Terms for Buyouts A. Balancing the Interests of Buyer and Seller 7/2 B. Lump-Sum Cash Payments 7/3 C. Equal Payments Under an Installment Plan 7/4 D. Combined Cash and Installment Payments 7/4 E. Interest-Only Installment Payments 7/6 F. Customized Schedules of Payments 7/7 8 Completing and UpdatingYour Buy-Sell Agreement A. Finalizing Your Buy-Sell Agreement 8/2 B. Resolving Buyout Disputes 8/6 C. Binding All Future Owners Under Your Buy-Sell Agreement 8/12 D. Updating Your Buy-Sell Agreement in the Future 8/13 E. Placing a Legend on Your Ownership Certificates 8/14 [...]... number of times during their adult life and when businesses are opened and closed with head-spinning speed, it’s a bit of a risky bet that you and your co-owners will all be doing the same thing even five years from now At some point during the life of your business, you or one of your business s co-owners will probably want to sell your interest in the business and move on to do something else For that... that either the company or the continuing owners can buy an owner’s interest to stop the transfer of an owner’s interest In the case of a corporation, if the corporate entity, rather than the continuing owners, buys an owner’s shares, it “cancels” them, which means the remaining owners’ percentage of ownership in the company increases accordingly Similarly, in the case of partnerships and LLCs, if the. .. buy-sell agreement (we cover the Agreement Price in Chapter 6) If the company and the other owners decline to purchase the ownership interest, the transferring owner is free to give away her interest But if the company or other owners decide they don’t want the transfer to go through, they must pay the owner for the interest according to the price and terms in the agreement Keep in mind that, if the company... in the notice within 60 days after the end of the nontransferring owners’ purchase option, according to the procedure in Section IV, Provision 1 of this agreement Excerpt 1 LIMITING THE TRANSFER OF OWNERSHIP INTERESTS the transferring owner But in the real world, the continuing owners may think highly of a person who wants to buy the transferring owner’s share And, of course, there can be a real incentive... in the Notice of Intent to Transfer submitted to the company by the transferring owner The price and terms in this notice override the general Agreement Price selected in Section VI of this agreement and the agreement terms selected in Section VII If the proposed transfer is a gift of the owner’s interest, the company and the nontransferring owners shall have the right to purchase the interest of the. .. transferring owner at the Agreement Price selected in Section VI and according to the manner of payments and other terms of the purchase as established in Section VII of this agreement Option 1b: Price and terms in agreement The company and the nontransferring owners shall have the right to purchase the interest of the transferring owner at the Agreement Price selected in Section VI and according to the. .. owner’s interest under a Right of First Refusal at the Agreement Price”—a price predetermined in the buy-sell agreement itself (we cover the Agreement Price in Chapter 6) In this case, even if the transferring owner receives a higher offer from the outsider, she must sell to the company or the continuing owners at the Agreement Price, if they so desire This alternative has the virtue of protecting the. .. continuing owners from being forced into business with an outsider who is willing to pay an inflated price—one that the continuing owners can’t afford or aren’t willing to match Of course, this provision is weighted heavily toward the interests of the continuing owners and is less favorable to a transferring owner, who could end up selling her interest for less than it’s really worth Using the Agreement. .. area of business planning, it can lead to financial undoing Many owners of successful businesses put off creating a buy-sell agreement because they don’t have time, or they think everything’s peachy—until it’s too late In short, no matter what stage you’re at in the business game, the time to create a buy-sell agreement is now When you’re forming a new business, by the time you have the notion that you... creating a buy-sell agreement It’s unlikely that either of you will want to get out of the company unless you both do, and if one of you dies while you still own the business, the other person will probably inherit the ownership interest Likewise, if you own a small business with a child to whom you plan to leave your share of the business at your death, it may be sensible to forgo a buy-sell agreement . NANCY MULVANY Proofreading JOE SADUSKY Printing CONSOLIDATED PRINTERS, INC. Mancuso, Anthony. Buy-sell agreement handbook: plan ahead for changes in the ownership of your business / by Anthony. When one of these circumstances occurs, the buy-sell agreement will kick in to protect your current way of doing business. 1/4 BUY-SELL AGREEMENT HANDBOOK Family Businesses Buy-sell agreements. shares of the business and who actively participate in the day-to-day management or operations of the business. If you are an owner of a family business, where your children or the children of relatives