A buy/sell agreement is an agreement that discusses how a member of an LLC or shareholder of a corporation can sell his or her ownership in the company. Often, it is its own separate agreement, but it doesn’t have to be. Just as often, it is a provision in another company document like an LLC’s operating agreement. For simplicity’s sake, I am going to talk about this using terms related to LLC’s, but feel free to use corporation terms in your head.
Of course, of course, when you start an LLC everything is going to go swimmingly for forever. No one will ever want to leave, and everyone will always get along. The biggest fight will be what should you do with the buckets of cash. BUT, what if that doesn’t happen? Or what if someone dies? Do you want to discuss what to do during the time of crisis or do you want to set out all of the terms now while everyone is getting along and, you know, breathing?
Let’s assume that you chose to go with deciding ahead of time rather than waiting on a séance. Some of the things you should discuss are:
- What happens if someone wants to leave the LLC? Does it matter because they just want out versus retirement?
- What if someone wants to sell some or all of his ownership units to someone else? Does it matter if that someone else is already a member of the company or a third party?
- What if someone dies? What should happen with his or her ownership units?
- Does the LLC want to buy shares? Other members?
- If we do a pay out, how does that happen?
- Should the LLC implement something like insurance policies to help with purchases?
- How do you value the ownership units in play?
- What if a majority owner wants to sell, do the minority owners get to come along and sell, too?
Add any other questions that you think could lead to fights in the future. Consider the parade of horribles and then figure out ways of making it less horrible when and if it actually happens. Now look at each action both from the perspective of the remaining members and as the member who is leaving (or kicked the bucket).
Sometimes you are the windshield; sometimes you are the bug. Make sure it isn’t too bad for either the windshield or the bug. It will be better for both in the long run if you plan ahead of time.