Buy-Sell Agreements Archives - Randel Law, Inc., Your Business and Succession Planning Lawyer

Is Now the Time?

April 8, 2020 By Rick Randel

My financial advisor friends and I never cease to be amazed at how many business owners don’t have a Buy-Sell Agreement. It’s like going out in the rain without an umbrella. Business owners know they should have a Buy-Sell Agreement but they procrastinate. Partly because they’re too busy, partly because they’re scared of the cost, and also maybe because they don’t want to face their own mortality. Well . . .

Is now the time?

One thing this pandemic has taught us is that we should always have our affairs in order and a plan to deal with contingencies.

So maybe now’s the time to finally do your Buy-Sell Agreement. Do you really want to find yourself in business with your late partner’s spouse? (Or your divorced partner’s ex-spouse?). Do you want your spouse to have to run your half of the business after you’re gone? Or would you rather he or she get bought out by your partner(s)?

A Buy-Sell Agreement can also help you obtain liquidity from your investment in your business, as I described in my previous post Building Liquidity Into Your Buy-Sell.

Or maybe you’re a solo owner with no partners, so a Buy-Sell Agreement doesn’t make sense. There are still many ways you can protect your business and your family should something happen to you. I call it the “Hit by a Bus Plan” (although maybe I should change the title to the “Hit by COVID-19 Plan”). This plan involves interim operating instructions for whoever has to run the business during your absence, transition instructions for your spouse, a salary continuation plan for your family to continue receiving money from the business to pay their expenses, and a key employee retention plan, which in some cases can involve a key employee buying the business from your spouse after you’re gone. For more information about the Hit by a Bus Plan, click here.

Maybe now’s the time to finally adopt a Hit by a Bus Plan to protect your business, your employees, and your family.

Feel free to contact me or your legal adviser if you feel like now’s the time to finally do your Buy-Sell Agreement or Hit by a Bus Plan. Or forward this email to a business owner you know, who might find it helpful. Best wishes and stay healthy!

This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.

Can You “Trust” Your Buy-Sell Agreement?

September 14, 2019 By Rick Randel

As many of you know, buy-sell agreements restrict ownership to a small group of owners who know each other and have decided they can do business together. They allow the other owners to buy the shares of an owner who experiences a “triggering event” such as death or divorce.

As many of you also know, many business owners put their shares into their revocable living trust. Which raises the question, what happens upon a triggering event to an owner whose shares are held in a trust?

The typical buy-sell agreement fails to address this situation. I have long suspected the other owners may find themselves unable to buy him or her out.

A recent court decision confirmed my suspicion. A partner whose shares were held in a trust died. The other partners invoked their buy-out rights, but the successor trustee refused to sell. The other partners sued. The court held that the actual partner was the trust, not the trustee. Therefore, even though the individual had died, the partner itself (the trust) didn’t die, and the buy-out rights of the other partners were not triggered. The successor trustee was allowed to continue owning the deceased partner’s shares, despite the other partners’ desire to buy him out. (Han v. Hallberg, 35 Cal.App.5th 621 (2019))

While Han v. Hallberg dealt with a partnership and not an LLC or corporation, a court would likely reach the same result in the corporate or LLC context. The vast majority of buy-sell agreements I have seen do not address what happens when shares or membership interests are held in a trust. A good buy-sell agreement should say that for the purpose of triggering events, the term “shareholder” (or member or partner) refers to the person who is the true underlying owner of the shares, i.e. the person who is active in the business and who the other owners consider to be their “partner”, even if the shares are held in a trust. So a triggering event that happens to that actual person triggers the others’ buy-out rights.

Feel free to contact me if you would like me to take a look at your own or a client’s buy-sell agreement and see if it adequately addresses what happens when shares are held in a trust. If it doesn’t, adding that coverage is a simple fix.

The Secret to Protecting Your Intellectual Property

August 28, 2018 By Rick Randel

This is a true story. Only the names have been changed. My client (let’s call her Karina) had negotiated a deal with the owner of another company (lets call him Phil) to acquire Phil’s company. During due diligence we discovered that Phil’s company didn’t own the code to its own website. Considering the business was an online store, the code to the website (a form of intellectual property or IP) was a vital assets.

When we pointed this out to Phil, his reaction was “That’s crazy. Of course we own it. We paid for it.” But he had neglected to put a “work for hire” clause in the contract with the developer. So he didn’t own the code. This nearly killed the deal. There was no way we were going to complete the purchase without getting ownership of the core IP. The deal was put on hold for a month while Phil negotiated with the developer to acquire ownership of the code. Lord knows how much more he had to pay the guy. And he almost lost the deal. He was lucky Karina didn’t walk.

The same thing would’ve happened if Karina were an angel or VC about to invest in the company. One of the main things they do is confirm the company owns the IP.

The lesson is, when you or your client hire service providers to create any intellectual property (basically any work product or deliverable), make sure the contract states that the company owns any IP the person creates. Of course the contract should also require them to keep company information confidential. This should be part of the standard onboarding process for all employees and contractors.

That way when the company receives a due diligence list from a potential buyer or investor, it’s an easy matter to just send them copies of the contracts all the service providers signed, so the buyer/investor can see they own their IP (and that they are well organized and professional).

Feel free to contact me if you have any questions.

Write your own Business Continuity Plan

May 19, 2018 By Rick Randel

You may remember my recent post about the Hit by a Bus Plan. The Hit by a Bus Plan helps owners stop worrying whether their business will continue and their family will be protected if something should suddenly take them out of the picture.

Well, business owners have to plan for other contingencies as well, such as earthquakes, fires, power outages, or worse. That’s not what I do, but I just came across an excellent tool developed by Ready.gov to help businesses of all sizes develop plans for such contingencies. I thought it might be helpful for my readers and their clients who haven’t yet developed a contingency plan. Here is a link to the tool:

https://www.ready.gov/business-continuity-planning-suite

You will be prompted to download and extract a zip file which contains a suite of tools including some business continuity planning videos, a business continuity plan generator, and a business continuity plan training exercise to test your plan. I started the process myself and it seems pretty painless. I hope you find this tool makes it easy to write your own contingency plan and worry less about what will happen to your business in the event of a fire, earthquake, or other disaster.

And if you want to worry less about what will happen to your business and family if you get “hit by a bus”, click here to contact me about developing your own Hit by a Bus Plan.

The “Hit by a Bus Plan”

August 26, 2017 By Rick Randel

What happens when the owner of a business suddenly dies or is incapacitated? Businesses without a plan can quickly go down the tubes. Employees leave, customers desert, and before you know it, the company is forced to shut down. The owner’s family gets no value from the business he or she spent so much time and effort building.

Companies with two or more owners can at least partially address this scenario through the buy-sell agreement. But what about companies with only one owner? Sole owner businesses need the equivalent of a buy-sell agreement. I call it the Hit by a Bus Plan. The Hit by a Bus Plan includes the following elements:

Interim operations plan
- Who runs the business while the owner is out? Who signs checks and pays bills? Who contacts customers and assures them their needs will be met? Who assures the employees that their jobs are safe? Having a plan that addresses these issues avoids chaos should anything happen.
Transition instructions for the owner’s spouse
- This is a document the owner gives to his or her spouse, to be used in an emergency. It lists the key advisors the spouse can rely on (e.g. banker, accountant, lawyer), the key employees who can be trusted, the employees and/or customers who are flight risks, and potential buyers of the company.
Salary continuation plan
- This designates a beneficiary (typically the owner’s spouse) to receive the owner’s salary for a certain period after his or her death or disability. Having this plan in place allows the spouse to continue paying the bills until the ownership transition is complete.
Ownership transition strategy
- This sets forth who will take over ownership when the owner is gone. Will the spouse/estate continue to own the business indefinitely? Will the spouse try to sell the business to a third party? Or will the spouse sell the business to one or more key employees? In the last case, an employee buy-sell agreement is prepared, obligating the employee(s) to buy the shares from the spouse.
Employee retention strategy
- Key employees can be incentivized to stay through a combination of employment agreements (ensuring employment for a certain period), stay bonuses (payable only if they remain with the company for a certain period), and equity. The equity portion will tie into the ownership transition strategy (see above) if the key employees are to be the new owners.

It may seem like a lot, but the Hit by a Bus Plan can be put together with less time and effort than you may think. Business owners owe it to their families, their employees, and their customers to have a plan in place. Trusted advisors, consultants, and others who advise sole owner businesses should talk to their clients about the importance of planning for such contingencies. Feel free to contact Randel Law, Inc., if you have any questions or would like some guidance on developing a Hit by a Bus Plan.