Business Entities: Buy-Sell Agreements

So, you’ve done it. You’ve found a co-founder who is willing to put up the money (or you’ve found a genius with a great idea!) for a new venture. Things are going great and you’re ready to get a business entity formed and have determined how it will be governed.

But, what if things don’t go as planned? It isn’t always actually sunny in Philadelphia. While Texas may have a lot more sunshine, both figuratively and literally, careful exit planning is required in the event of a disagreement among co-owners.

 

What is a buy-sell agreement?

A buy-sell agreement provides a clear path for dealing with a number of unplanned events, including death, divorce, or business disagreements. These provisions are critical to the success of a business not being interfered by third-parties or outsiders who may not possess the skills or capital necessary to achieve the organization’s goals. This is particularly acute in the case of the untimely death of a co-founder. The last thing co-founders or the grieving family wants to deal with is arguing over how much the venture is worth and who is required to purchase it.

 

Why do we need this again?

Simply put, life happens. Priorities in a co-founder’s life may change, business visions may splinter, and disagreements that are unresolvable may occur. In order to fully protect the best interests of all involved and stay out of litigation, dealing with these potential events up front is the best way to minimize the risk of lengthy and costly disputes.

This can be a part of the particular governing documents that allow for an efficient and effective plan to be in a place in case something happens.

 

What are the options?

Depending on the particular event that triggers a provision (something that will need to be considered when drafting these provisions), different valuation mechanisms can be used.

Some provisions may include a set price or a formula for determining the value of the business interest.

Since the early days of the oil boom, Texas has been a leader in the world of business law. With complex transactions making up a number of the state’s largest enterprises, the Texas legal community helped create a mechanism now referred to as a “Texas Shootout” provision. While no longer involving meeting on main street at high noon, it provides a mechanism for disputes to be resolved between co-founders when vision and strategies begin to diverge.

In this shootout, a sealed bid is made by each co-founder for how much each ‘share’ or ‘interest’ is worth. The highest bid “wins” and the loser must sell their shares (and the winner must buy) at the given price.

There are a number of variations on provisions like this for deadlock on strategy and ownership disagreements. Experienced legal counsel can navigate what the best is for a particular co-founder. In order to determine what provision best suits the interest of a particular co-founder a number of variables need to be considered such as net worth, liquidity of assets in the event of needing to purchase a co-founder’s share, and the intellectual property rights of the respective parties, including the company.

If you want assistance with determining what provisions your next or current venture should utilize in the event of a disagreement, contact the SAVaGE lawyers at Chester PLLC.

The SAVaGe Entrepreneur Knowledge Base (“SE-KB”) is part of a series of articles written and published by CHESTER PLLC, a Dallas-based law firm that advises innovation-based entrepreneurs, and emerging companies regarding their core legal issues (www.chester-law.com).   Information provided is for informational and entertainment purposes only, and is not legal advice.