Sometimes events such as death, disability, a lost license, and early retirement change things. The owners and the company can respond to these changes by creating a right, but not the obligation, to force a buyout of the deceased owner’s estate, the disabled owner, the owner whose license was suspended or revoked, or the retired owner.
When an owner dies, the owner’s spouse, children, or whomever else is the beneficiary of their interest becomes the new owner. The remaining owners may not want to be in business with this new owner. In that case, the remaining owners and the company will want to have the option to purchase the new owner’s interest. This should be an all or nothing proposition.
On the flip side, the owners may want to give a right to the deceased owner’s spouse, children, or whomever else is a beneficiary to force a sale of their interest on the owners.
Active owners need each other to run the business. If an owner becomes disabled with a chronic illness or injury, then the active owners have to shoulder the extra weight of the disabled owner. The active owners might not be able to support the disabled owner. The owners and company may want to give each other the option to purchase a disabled owner’s interest to account for this change.
The owners will define disability, designate the party who declares a disability, and determine the length of the disability before the option is triggered. If the active owners or company exercise this right, they will be able to replace the disabled owner or continue the business without the disabled owner.
Some businesses such as professional firms require licensed owners. Some businesses depend on licensed owners even though a licensed owner is not required. If an owner loses his or her license, the other owners or company may want to have the right to buy the unlicensed owner’s interest at a discounted price because it might affect the value of the company.
Some active owners may want to retire or quit working for the company. This might create tension between the retired owner and the active owners who are now carrying the weight of running the company. The owners may want to give each other and the company the right to purchase the interest of any owner who chooses to retire or quit.
The courts have a right to divide marital property. This includes an owner’s interest in the company. This means you might end up with an ex-spouse as an owner in your company. The owners or the company may force an ex-spouse to sell his or her interest if the spouse signs the buy-sell agreement with this right. If you don’t want to bother with getting the spouses of the owners to sign this agreement, you can always take your chance that an owner will not get divorced or that the judge will give the full interest to the owner and none to the ex-spouse.
If an owner files for bankruptcy, the bankruptcy trustee can get the bankruptcy owner’s interest in the company, then sell it to pay off creditors. In extreme cases the bankruptcy trustee can exercise the rights of the bankrupt owner and sell the company’s assets or liquidate the company altogether to pay off creditors. The owners can agree that an owner who is about to file bankruptcy must provide notice to the other owners before filing for bankruptcy to give the other owners time to structure and force a sale of the bankrupt owner.
A pledge is an owner’s use of his interest in the business as collateral on a loan. If he defaults on the loan, then the bank takes the interest. The owners may prohibit pledges, require consent for a pledge, or require the right to pay off the loan and take back the owner’s pledged interest.
Sometimes owners do bad things such as abuse drugs or alcohol, embezzle, or exhibit disturbing behavior. In these cases the other owners will want the option to expel the misbehaving owner and buy his interest at a discounted price.