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Exit Strategies For Small Business Owners - How to Get Out of a Bad Business

Prepared By: Melissa C. Marsh, Los Angeles Business Attorney
Written: May 2006

Buy-Sell Agreements.

A buy-sell agreement is a binding contract between co-owners of a company that establish policies for dealing with major disputes, an unforeseen divorce, an untimely disability or death, bankruptcy, and even the plain desire for one of the owners desire to quit the business, or sell his or her interest in the business. Often buy-sell agreements contain terms that control when and how owners can sell their interest, who can purchase their interest, and what price will be paid.

Every co-owned business (whether a partnership, corporation, or limited liability company) needs a well drafted buy-sell, or buyout, agreement. The best time to set up a buy-sell is when you start-up the business. And while it is never too late, the longer you wait the more complex and expensive it can get. Every day that value is added to the business without a plan for future transition, it increases its financial risk. And, while co-partners may get along great when they form a business, things can, and often do, change.

Only by planning, can multiple owners be assured of a smooth transition and certain guarantees if one of the above life events occurs. If one of the owners dies or become disabled, a buy-sell agreement can provide for an insurance funded payout. If divorce is a possibility in the future, the buy-sell agreement can require the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the business, or other co-owners pursuant to the pre-determined valuation method provided for in the buy-sell agreement.

If one of the co-owners declares bankruptcy, a well drafted buy-sell agreement can prevent a bankruptcy trustee from liquidating (selling) the business to pay the bankrupt owner's debts.

If a major dispute between the owners cannot be resolved amicably, a buy-sell agreement can provide a fair mode and means for a buy-out of one of the owners' interest at a pre-determined value.

In essence, a buy-sell agreement enables partners and shareholders of a corporation to agree, in advance, to the terms and conditions of a future sale or to smooth the transfer of an ownership stake under certain triggering events such as a desire to retire, to merely go in a new direction, a need to declare bankruptcy, an unforeseen divorce, and even an untimely disability or death. A buy-sell agreement can also provide a framework for establishing the purchase price of a business interest at any given time.

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© 2006 Melissa C. Marsh. All Rights Reserved.

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Disclaimer: The information presented on this web site was prepared by Melissa C. Marsh for general informational purposes only and does not constitute legal advice. The information provided in my articles and alerts should not be relied upon, or used as a substitute for professional legal advice from an attorney you retain to advise or represent you. Your use of this Internet site does not create an attorney- client relationship. Transmission of this article is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All uses of the contents of this site, other than personal uses, are prohibited. You may print or email a copy of any information posted on this web site for your own personal, non-commercial, use, but you may not publish any of the articles or posts on this web site without the Express Written Permission of Melissa C. Marsh.

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Located in Los Angeles, California, the Law Office of Melissa C. Marsh handles business law and corporation law matters as a lawyer for clients throughout Los Angeles including Burbank, Sherman Oaks, Studio City, Valley Village, North Hollywood, Woodland Hills, Hollywood, West LA as well as Riverside County, San Fernando, Ventura County, and Santa Clarita. Attorney Melissa C. Marsh has considerable experience handling business matters both nationally and internationally. We routinely assist our clients with incorporation, forming a California corporation, forming a California llc, partnership, annual minutes, shareholder meetings, director meetings, getting a taxpayer ID number (EIN), buying a business, selling a business, commercial lease review, employee disputes, independent contractors, construction, and personal matters such as preparing a will, living trust, power of attorney, health care directive, and more.