It’s very common for small businesses to have “buy-sell” agreements. These say that if one owner leaves, dies, or gets divorced, the other owners can buy out that owner’s interest. The purpose is to make sure that if something happens to one owner, the other owners can continue to operate the business without having an ex- spouse, child, or stranger as an unwanted partner.
If you have such an agreement or are thinking of signing one, it’s a very good idea to have it reviewed by a family law attorney. This is true if any of the owners might someday get divorced, even if you personally are unlikely to get divorced or aren’t even married.
Here’s why: Buy-sell agreements typically set a price at which the other owners can buy the owner’s shares, or a method for determining the price, such as book value, a multiple of current annual profits, an independent appraiser’s estimate, or a board valuation made in good faith.
But there’s a conflict between the owners, who generally want to set a lower buyout price, and a divorcing spouse, who will want to place as high a value on the business interest as possible.
If the buyout formula is out of step with current divorce law, then a divorcing member could be caught in a trap: He or she could have to compen- sate an ex-spouse based on a higher value for the business, but not have enough income from selling his or her share to do so.
This creates an incentive for the divorcing owner to challenge the validity of the buyout provisions in court.
Another issue is that many buy-sell agreements require owners who get married to sign a prenup- tial agreement limiting a spouse’s right to receive an interest in the business at divorce. But any such requirement needs to be squared with the current law on prenuptial agreements.
For instance, some buy-sell agreements might require owners to include provisions that are legally unenforceable, or that will result in the prenuptial agreement as a whole being invalidated. And if the terms of the required prenup are too draconian, it might cause a potential spouse to walk away from the marriage, or make excessive demands in return, which could also prompt an owner to challenge the buy-sell agreement in court.