DOES YOUR BUSINESS HAVE A BUY-SELL AGREEMENT?

Oct 05, 2023

By: Daniel J. Fetter, Esq.



In the context of a closely held business (be it a partnership, limited liability company or corporation), a Buy-Sell Agreement is highly recommended to address what happens to an owner’s business interest upon the occurrence of certain “trigger events”, which typically include a partner’s death, disability, voluntary or involuntary termination of relationship and retirement.


A Buy-Sell Agreement is often compared to a prenuptial agreement between business partners.  First, as with a prenuptial agreement, which sets forth each spouse’s rights and obligations in the event one spouse wants to leave the marriage, a Buy-Sell Agreement sets forth each owner’s rights and obligations (and the entity’s rights and obligations) if an owner voluntarily or involuntarily leaves the business. Second, business partners should enter into a Buy-Sell Agreement prior to starting the business venture.


Some of the main objectives of the Buy-Sell Agreement include: (1) designating a buyer or buyers that are authorized to purchase an owner’s interest upon the owner’s death, disability, termination, retirement, etc.; (2) protecting the owner or his/her estate from being locked into an interest in a closely held business; (3) providing a source of funds with which to pay estate taxes or to generate income for the terminated owner or his/her family; (4) preserving control of the business with the remaining owners; (5) precluding owners from selling their business interest to third-parties without the consent of the other owners; and (6) providing a value for the purposes of estate taxes.


A Buy-Sell Agreement may also contain post-termination prohibitions against competing with the business, soliciting customers and employees and against using the proprietary information of the business.


A “handshake” understanding between business partners welcomes uncertainty and potential conflicts among family members and co-owners. Accordingly, having a type of legally enforceable, written agreement in place in the form of a Buy-Sell Agreement establishes the necessary transition plan in a much more certain and less conflict prone manner. Once in place, Buy-Sell Agreements should be periodically reviewed and updated as the situations of both the business and its owners change over time.


Buy-Sell Agreements must be considered in conjunction with not only a business owner’s business plan, but also that individual’s overall financial and estate plan to ensure advantageous tax treatment, creditor protection and other benefits.


If your business does not have a Buy-Sell Agreement in place, or has one that has not been reviewed recently, please contact Daniel Fetter or the attorney at our firm with whom you work.


This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

SMB M&A SERIES: What Is A Letter of Intent?

26 Jun, 2024
By: Daniel J. Fetter, Esq. The SMB M&A series provides insights into buying and selling a small business. If buying or selling a business, you may have heard of a "Letter of Intent" or "LOI". What is it and why is it important? The LOI is a non-binding offer that allows the parties to agree at a high level on certain key terms and conditions of a proposed deal. Starting with an LOI can make the deal process more efficient as it creates a roadmap when drafting and negotiating the definitive agreements. The LOI typically includes the following terms/conditions: Transaction Structure . In most cases, the LOI will specify the transaction structure – whether the buyer is acquiring the stock or assets or some other type of arrangement. Purchase Price and Method of Payment . It sets forth the purchase price or how the purchase price will be determined, including any post-closing price adjustments or working capital calculations. The LOI will also address how the purchase price will be paid (cash, seller financing, debt assumption, equity, etc.). Due Diligence . The LOI will outline the time period for the Buyer to conduct its due diligence investigation (typically 30-90 days after signing the LOI) and the limitations around that investigation (e.g., when the Buyer can contact employees and customers). The due diligence investigation will allow the Buyer to inspect the business from a financial, legal and tax standpoint. Conditions . It may include certain conditions that must be met for the parties to proceed with the transaction, including Buyer obtaining financing and/or any necessary government or third-party approvals. Exclusivity . The LOI will typically include an "exclusivity" or "no shop" clause that prohibits the Seller from entertaining other offers from prospective buyers for a period of time. Generally speaking, the LOI is non-binding and cannot force a buyer or seller to proceed with the transaction. With that said, however, there are certain provisions which create binding obligations on the parties, including: (a) each party will cover their own expenses in pursuit of the transaction; (b) the governing law applied to the LOI; (c) the confidential nature of the proposed transaction; and most importantly (d) the exclusivity clause discussed above. The Scolaro Law Firm handles small business M&A transactions throughout New York State, Vermont, Pennsylvania and Florida. If you are interested in buying/selling a business, please contact Daniel Fetter or the attorney at our firm with whom you work. This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.

SMB M&A SERIES: Before Disclosing Confidential Information. . .

24 Jun, 2024
By: Daniel J. Fetter, Esq. The SMB M&A series provides insights into buying and selling a small business. When preparing to sell your business, make sure you require any potential buyer to sign a Non-Disclosure Agreement ("NDA") before disclosing any confidential information. An NDA protects sensitive information like financial records, customer information, intellectual property and other proprietary information (including that you are in discussions to sell your business) from unauthorized disclosure. By requiring potential buyers to sign NDAs, you maintain confidentiality throughout the sale process and preserve the value of your business. In the event of a breach, the disclosing party may be entitled to monetary damages or injunctive relief to prevent further disclosure. In addition to the NDA, Sellers should take other precautions to avoid disclosure of Confidential Information, including: Limit disclosure only to those individuals who need to know for purposes of pursuing the transaction; Wait to disclose your most sensitive information (e.g., customer list) until you have more assurance that the deal will close; Use data rooms to share information rather than sending documentation by mail/email. This also allows users to track who viewed the information. The Scolaro Law Firm handles small business M&A transactions throughout New York State, Vermont, Pennsylvania and Florida. If you are interested in buying/selling a business, please contact Daniel Fetter or the attorney at our firm with whom you work. This article is intended to be for informational and discussion purposes only and is not to be construed as legal advice or as a legal opinion on which certain actions should or should not be taken.
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