Buy-Sell Agreement Handbook: Plan Ahead for Changes in the Ownership of Your Business

254 Pages·2003·1.25 MB·English

by  Anthony Mancuso

About Nolo
Have a legal question? Chances are Nolo can help you answer it, both in print
aFpnordor obthnlerlmienees .dweitcha dceosn, fNidoelnoc'se ,m a ismsiioninm huams boef efuns tso a hnedl pe xppeeonpslee, saonldv—e twhehiern leevgearl
pOIfonoIaansva nrTdtsi edunmhtdMivhardbophfe a loesedl-loewt en tnrh7deo aso—tnm8 e0 vntaft-f 0 e hsdgodalNrywes,lee te aroe,wgsi o itmcoawpttIoaeenlehernloe-f h nts po l pwd'beet,wets -uah wregl bnopychctneagy, r er koilep aawl-k oe’sen intsve,pnlgd e teav reesferep we soixPdaoeoptuonrmytpripd fbsnmiioeiflene nkeolsaraidngans srs.ldns utt teheiceuaid,rnc doidondtunc t no cyhmd scgeoi oop tn vaduappCiniue vocsretruvrarDa h nalte Wioyilloecsev sna ne te trw bnii9itollPserclileon0Mn e ronatsc s oe lcolcpmate,. d eooaopekDsRau vem sclkoenaaaocari cniffy iftrtwni layosyhc aay-n o.on belg cE lfdtfTnl nlho n ooetw oieahrLhgz ai muttioeliorvdwinoa,rs r is scnfgN hilCae htbdk g asht oe obl eTbhnteb llnoeroaaidop yutds totk s cset yisass ktino,r taotyt .es,fMa'o mn-suo wartc rd rosaptbmogh emikue-beeendde,ts ystarte rwat tttame, ty r eitiwhew o nosayal ene.hikoag nnW ggy oiijudncgdoea t t hegitlbc aaro t ta e llutao lemadnod csls gtso teoowohkaoflnfiy kldseunoye .eldtor.,omkur.
yDtoaenuocdreh scni moothmlpoirspgo umyvt eeee vraa.onlll vwoeuesr pa cnlaudnr rttehone at I bnpatrneodrdnouenct t ose,u xmrp abankodionskg, swy ioenu wpr rialilnc ctc?oe Asnstb itsnoou letu htteeo l ylra ewndo etths. ieAg nsbest
it can be.
“America’s leading source of self-help legal
(cid:1)(cid:1)(cid:1)(cid:1)
information.”
—Y !
AHOO
LLEEGGAALL IINNFFOORRMMAATTIIOONN
OONNLLIINNEE AANNYYTTIIMMEE
22 44
hhh uu rr ss aa dd aa yy
www.nolo.com
AT THE NOLO.COM SELF-HELP LAW CENTER, YOU’LL FIND
• Nolo’s comprehensive Legal Encyclopedia filled with plain-English
information on a variety of legal topics
• Nolo’s Law Dictionary—legal terms without the legalese
• Auntie Nolo—if you’ve got questions, Auntie’s got answers
• The Law Store—over 200 self-help legal products including
Downloadable Software, Books, Form Kits and eGuides
• Legal and product updates
• Frequently Asked Questions
Our
• NoloBriefs, our free monthly email newsletter
“No-Hassle”
• Legal Research Center, for access to state and federal statutes
Guarantee
• Our ever-popular lawyer jokes
Return anything you buy
Q
ualityLaw Books & Software directly from Nolo for any
reason and we’ll cheerfully re-
for Everyone
fund your purchase price.
No ifs, ands or buts.
Nolo’s user-friendly products are consistently first-rate. Here’s why:
•
A dozen in-house legal editors, working with highly skilled authors,
ensure that our products are accurate, up-to-date and easy to use
•
We continually update every book and software program
to keep up with changes in the law
•
Our commitment to a more democratic legal system informs all of our work
•
We appreciate & listen to your feedback. Please fill out and
return the card at the back of this book.
Read This First
T
he information in this book is as up to date and accurate as we can make it. But it’s
important to realize that the law changes frequently, as do fees, forms and procedures.
If you handle your own legal matters, it’s up to you to be sure that all information you use—
including the information in this book—is accurate. Here are some suggestions to help you:
First, make sure you’ve got the most recent edition of this book. To learn whether a later
edition is available, check the edition number on the book’s spine and then go to Nolo’s online
Law Store at www.nolo.com or call Nolo’s Customer Service Department at 800-728-3555.
Next, even if you have a current edition, you need to be sure it’s fully up to date. The law
can change overnight. At www.nolo.com, we post notices of major legal and practical changes
that affect the latest edition of a book. To check for updates, find your book in the Law Store
on Nolo’s website (you can use the “A to Z Product List” and click the book’s title). If you see an
“Updates” link on the left side of the page, click it. If you don’t see a link, that means we
haven’t posted any updates. (But check back regularly.)
Finally, we believe accurate and current legal information should help you solve many of
your own legal problems on a cost-efficient basis. But this text is not a substitute for personal-
ized advice from a knowledgeable lawyer. If you want the help of a trained professional, consult
an attorney licensed to practice in your state.
2nd edition
Buy-Sell
Agreement
Handbook
Plan Ahead for Changes in the
Ownership of Your Business
by Attorneys Anthony Mancuso & Bethany K. Laurence
Second Edition MAY 2003
Editor BETHANY K. LAURENCE
Illustrations MARI STEIN
Book Design TERRI HEARSH
Cover Design SUSAN PUTNEY
Index NANCY MULVANY
Proofreading JOE SADUSKY
Printing CONSOLIDATED PRINTERS, INC.
Mancuso, Anthony.
Buy-sell agreement handbook: plan ahead for changes in the ownership of your business
/ by Anthony Mancuso & Bethany K. Laurence.-- 2nd ed.
p.cm.
Rev. ed. of: How to create a buy-sell agreement & control the destiny of your small
business. 1st ed. 1999.
Includes index.
ISBN 0-87337-926-8
1. Sale of business enterprises--Law and legislation--United States--Popular works. I.
Laurence, Bethany K., 1968- II. Mancuso, anthony. How to creat a buy-sell agreement
& control the destiny of your small business. III. Title.
KF1659.Z9M36 2003
346.73'0652--dc21
2003048773
Copyright © 1999 and 2003 by Anthony Mancuso and Nolo. ALL RIGHTS RESERVED. PRINTED IN THE USA.
No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical,
photocopying, recording or otherwise without the prior written permission of the publisher and the author.
Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use.
For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. For academic sales or textbook
adoptions, ask for Academic Sales. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, CA 94710.
Acknowledgments
Many people at Nolo Press contributed to this book: Our special thanks to Jake Warner,
whose encouragement and guidance helped make this book a reality. Major thanks to Terri
Hearsh for her patience and hard work in designing and laying out the book and to Toni
Ihara for her colorful cover. Also, sincere thanks go to Mike Mansel for reviewing the
funding and insurance chapter and to Walter Gibbons for lending a keen eye to the tax
law chapter.
Dedication
To Jason, who became my husband somewhere in between the second and third drafts,
without whose warm support and tireless tolerance I might not have finished this book,
and to my mother and father, who continually encourage me to achieve whatever mark I
set my sights upon.
—BKL
About the Authors
Tony Mancuso is a California attorney and the author of Nolo’s best-selling corporate law
series, including How to Form Your Own California Corporation and Incorporate Your
Business. Tony’s recent books include The Corporate Minutes Book and Your Limited
Liability Company: An Operating Manual. Tony is a jazz guitarist and a licensed helicopter
pilot.
Bethany Laurence joined Nolo as a small business editor and author in 1997. She divides her
time between editing small business products and developing content for the Nolo website.
Beth is the editor of several Nolo products, including Tax Savvy for Small Business, Take
Charge of Your Workers’ Compensation Claim and Quicken Lawyer Business software. She
received her law degree from the University of California, Hastings College of Law in 1993
and her undergraduate degree from Boston University in 1990 (Phi Beta Kappa, Magna Cum
Laude).
Table of Contents
1 An Overview of Buy-Sell Agreements
A. What Is a Buy-Sell Agreement?................................................................. 1/3
B. Why Should You Create aBuy-SellAgreement?........................................ 1/4
C. When Should You Create a Buy-Sell Agreement?...................................... 1/8
D. How to Use This Book..............................................................................1/9
2 Limiting the Transfer of Ownership Interests
A. Transferring Ownership Interests............................................................... 2/2
B. Right of First Refusal.................................................................................2/2
C. Absolute Transfer Restrictions.................................................................2/11
3 Providing the Right to Force Buyouts
A. Why Provide the Right to Forcethe Sale of an OwnershipInterest? ......... 3/3
B. What If an Owner Wants to Retire or Stop Working?................................ 3/5
C. What If an Owner Becomes Mentally or Physically Disabled? ...............3/13
D. What If an Owner Dies?.........................................................................3/18
E. What If an Owner Divorces? ..................................................................3/26
F. What If an Owner Loses His or Her Professional License?......................3/29
G. What If an Owner Files for Personal Bankruptcy?...................................3/31
H. What If an Owner Defaults on a Personal Loan? ....................................3/33
I. What If an Owner Is Expelled? ...............................................................3/35
4 Structuring Buyouts
A. Types of Buyout Procedures......................................................................4/2
B. How Our “Wait and See” Approach Works.............................................. 4/5
5 Funding Buyouts
A. Cash .........................................................................................................5/2
B. Borrowing.................................................................................................5/2
C. Insurance..................................................................................................5/3
6 How to Set the Buyback Price in Your Agreement
A. Why Choose a Price in Advance?............................................................. 6/2
B. What Valuation Methods Are Based On.................................................... 6/3
C. How Our Valuation ProvisionsWork........................................................ 6/5
D. Agreeing on a Fixed Buyout Price (Valuation Method 1)........................... 6/6
E. Buyout Formulas.......................................................................................6/9
7 Choosing Payment Terms for Buyouts
A. Balancing the Interests of Buyer and Seller............................................... 7/2
B. Lump-Sum Cash Payments........................................................................7/3
C. Equal Payments Under an Installment Plan............................................... 7/4
D. Combined Cash and InstallmentPayments ............................................... 7/4
E. Interest-Only Installment Payments........................................................... 7/6
F. Customized Schedules ofPayments.......................................................... 7/7
8 Completing and UpdatingYour Buy-Sell Agreement
A. Finalizing Your Buy-Sell Agreement.......................................................... 8/2
B. Resolving Buyout Disputes.......................................................................8/6
C. Binding All Future Owners Under Your Buy-Sell Agreement...................8/12
D. Updating Your Buy-Sell Agreement in the Future....................................8/13
E. Placing a Legend on Your Ownership Certificates...................................8/14