New Yorker\’s are a mobile bunch. Especially New York business owners. Business open and close every day. It is risky to believe that your co-owners will still be with you five years down the line. It is likely that there will come a time when of your co-owners will want to sell his shares or interests in the company to someone else. One of the most common ways that a small business can get disrupted is when an owner desires to sell or transfer his interests in a company. So, what should you do? You should create in advance a method for the owners to review and block any that is not in the best interests of the company. Here are some things you should think about:
- Right of First Refusal. This is the most common provision in a buy-sell agreement. The owner who wishes to sell his interests first offers it to his co-owners before anyone else.
- Decide the Price of the Ownership Interests in Advance. Often the price will be set at the price a proposed outside buyer has bid. I do not recommend this option because a fraudulent offer is possible. Another method is to set a pre-determined price at the time a buy-sell agreement is drafted. Another option is to set a high down payment price which would show good faith.
- Make clear the effect of any sale on Minority Owners. Often a right of first refusal provision may freeze out a minority owner from selling his interests. As a result, it may be important to include a \”Right to a Forced Sale\” clause.
- Decide who can buy the interest. Should the company have the right to purchase shares or the individual owners?
- Should an owner be able to give away his interest? Often owners wish to grant their interests in a company to a trust for estate planning reasons. This could be problematic because technically the trust would own the shares of the business. Often these issues are addressed when drafting a buy sell agreement.
- No Transfer Restrictions. Refusing to transfer any ownership interest is another possibility. This can limited in a few different ways, such a no transfers to certain persons and no transfers without written consent of the other owners.
You should decide in advance what to do if an owner of a business wants to transfer its interests through a buy sell agreement to avoid unnecessary problems and potential litigation.