Preparing for a Business Divorce with a Buy-Sell Agreement
This week I purchased the new Ace Frehley CD, “Anomaly”. Ace is, of course, the original lead guitarist for rock legends KISS, a longtime favorite of mine.
KISS is currently celebrating its 35th anniversary, but only one-half of the original band (Paul Stanley and Gene Simmons) are still in the band. The other original members – Ace and drummer Peter Criss – departed, reunited, then departed again and are now solo performers.
KISS was and is, at its heart, a business partnership, and in that regard it is like any other business. Its partners have had differing visions over the course of the business’ existence and when those visions collide, it was decided that it was best to dissolve the partnership and for some of the partners to leave the business Partners came and went, and the partners have had to negotiate the terms of their separation.
No doubt that negotiations surrounding KISS’ breakups, reunions and more breakups have made some lawyers a decent income.
What about “normal” businesses whose owners don’t have rock stars’ millions to pay attorneys to negotiate separations from their partners? I have just recently assisted two separate businesses with separation arrangements. Fortunately, the parties in both instances had the good business sense to negotiate a mutually beneficial, cost-effective resolution rather than engage in a prolonged standoff which would only lead to costly litigation. Unfortunately, these instances are not the norm.
For those feuding business partners who cannot reach a voluntary resolution as to separation, enormous cost and expense could have been saved by entering into a buy-sell agreement at the start of the business venture.
A buy-sell agreement is, in essence, a business prenuptial agreement. It specifies certain “triggering events” which, if they occur, give the other owners and/or the company itself a right of first refusal over the ownership interest of the owner who is subject to the triggering event. Common triggering events are an attempted voluntary sale to a non-owner, an involuntary transfer (such as a transfer arising from a divorce, bankruptcy or judgment collection), disability and death.
The buy-sell agreement, if drafted properly, will clearly spell out (i) what the triggering events are, (ii) who has what rights of purchase (typically the remaining owners can purchase the interest subject to transfer on a pro rata basis in accordance with their existing percentage ownership, and if they do not exercise, the company can then elect to redeem the interest); (iii) how the other owners exercise their rights of first refusal (including notice from the owner whose interest is subject to transfer to the other owners, those owners’ own notice of election to purchase their portion, and the timing of the closing on the purchase(s)); and (iv) the method for establishing the purchase price and payment terms.
With regard to these terms, there are no rules set in stone; the owners are free to negotiate a set of terms that work for them. What is important is to make sure that all the bases are covered so there is no ambiguity when it comes time to act pursuant to the buy-sell agreement.
I work with a lot of clients who go into business with family members or close friends, and at the start of their business they cannot fathom being at odds with their business partner. Once they hear of some of the stories of past battles I’ve had to participate in – and the cost of fighting those battles – most of them opt to execute a buy-sell agreement.