Buy-Sell Agreements: Mistakes to Avoid (Part 2)

August 27, 2016 - Posted by: admin - In category:

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A buy-sell agreement can provide essential protections for business owners.

Don’t take my word for it, listen to the contributing writers at Forbes.com.  Though this article is not new, the applicability of the February 2011 article by Robert W. Wood, titled “In Business, Get a Buy-Sell Agreement!” has not changed.  You can click here to read that Forbes.com article.   Continuing our discussion about mistakes to avoid in the context of buy-sell agreements and business ownership and management, the mistake of not having a buy-sell agreement must be at the very top of any list of mistakes to avoid in this area.  By the way, if you missed the last post on this topic, you can click here to read post #1 in the series.

Another mistake to avoid is that of failing to consider other legal agreements and arrangements in relation to a buy-sell agreement.  It is quite common that the buy-sell agreement is something of an afterthought in the overall process of starting, structuring and running a business.  During the period of time before drafting and signing the buy-sell agreement, the company (and its owners) have usually entered into several other agreements which may have a direct impact on the terms of the buy-sell agreement.  Therefore, the buy-sell agreement must be written and implemented in the context of such already-existing legal obligations.

For example, a buy-sell agreement and the estate planning papers of the owners of the company might be inconsistent in how they call for the distribution of company ownership over time.  To take it a step further, I can almost guarantee that there are such inconsistencies and contradictions if the buy-sell agreement has been written by a different attorney than the one who drafted the estate planning papers.  Often business owners don’t think to tell their respective business law attorney that they have an existing estate plan. And vice versa, they often fail to tell their estate planning attorney of the existence of a buy-sell agreement.  Other company legal papers which could conflict with a buy-sell agreement include articles of incorporation/formation, partnership agreements, bylaws, operating agreements, loan and security agreements, franchise agreements, leases, licenses and other intellectual property agreements, personal guarantees, etc.

What then does this mean for you as a business owner if you have just become aware of these realities? What do you do if you currently have one or more of the aforementioned legal papers which could conflict with your buy-sell agreement? First, don’t panic. It is very likely the case that you still have the ability to make changes to any or all of such documents so that rather than conflict and contradict, such legal agreements can be made to dovetail and work in concert to accomplish your objectives.

The first step is to gather your various legal papers and take them to a competent attorney for review (preferably one who has expertise and experience in both corporate law and estate planning matters). This duel-faceted expertise is essential because an estate planning attorney who has not dealt with buy-sell agreements will not have the proper perspective to deal with your buy-sell agreement.  Likewise, a business law attorney who does not work regularly with estate planning documents likely will not be qualified to review and amend your estate planning papers.  If you are not able to find an attorney with this duel-expertize, you can ask your business attorney to enlist the services of an estate planning attorney or vice versa.  Attorneys often work together in this manner, with each contributing their respective expertise for the good of the client.  If you happen to have one or more attorneys who are not able to “play well with others” then you should get a different attorney.

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