Buy-Sell Provisions in LLC Operating Agreements
Closely held businesses with more than a single owner should have buy-sell provisions that address what happens on the death or disablility of an owner. These agreeements can also address proposed exit strategies, dispute resolution, managment structure, noncompete agreements, antidilution provisions and valuation methods. The meat of the agreement tends to be the right or obligation to buy or sell an owners interest.
Because these agreeements are negotiated they tend to be customized to each entities needs. The triggering events may include some or all of the common triggering events including: death, disability, and, retirement. The agreement may have different approaches to resolution based on the different triggering events. People generally spend a fair amount of time considering these issues.
While death is easy to determine, disability and retirement declaration are subject to ambiguity. If you have disabililty insurance funding the agreement you should use a similar definition for the agreement.
The agreement can either provide for options to sell, purchase or mandatory sales or purchases. The agreement may provide that the enterprise must redeem an owners interest. The overwhelming issue may simply be who can afford to excercise the purchase. The critical issues that are raised are: Whether existing loan documents limit changes in control or payments to owners; statutory limits on distributions to owners; the effect on entity control; tax concerns regarding the character of distributions.
How to Determine the Price
While the parties may stipulate to a value, you should provide for an appraisal method to value the business. The stipulated value or methodology could always be challenged as unfair.
Paying the Piper
The buy sell agreement may be funded by the buyer, the seller or through insurance.
Posted on: 19 March 2013, by : Clayton Walker