If you are getting divorced as a small business owner, you need to be aware of several factors as you begin and eventually complete the process. You should be familiar with how important it is to be prepared for circumstances that may impact your business throughout the divorce case. Even though you have spent a great deal of time, effort and money building up your business, that does not mean that you are guaranteed to operate the business exactly as you are now once your divorce comes to an end.
Instead, you must devise a plan and stick to it to protect yourself and your business from what can happen within a divorce. Even if you can retain your small business once your divorce is over worth, there is no telling the exact impact your divorce may have on your business and your life in general. Many people express frustration that they let the divorce get to them, and Their business suffered. If nothing else, you need to protect your business from your personal life so that once the divorce is over, you can operate in function within the business average period.
Let’s suppose that you own a business with a group of people or even with a partner. This partner could be your spouse or could be another person. In a situation like this, what can you do 2 protect yourself and your business from the potential harms of your divorce? After all, it would be less than ideal for your spouse to walk away with all the industry, especially given the effort you put into creating it in the first place. A buy-sell agreement may be precisely what you need in this scenario.
A buy-sell agreement provides you with an overview of what will happen if you go through a divorce. Rather than leaving it up to chance or taking care of the issue, later on, the buy-sell agreement allows you to lay out ahead of time what will happen and how the price of your or your spouse’s share of the business will be determined. This cuts through many of the difficulties associated with selling a business and allows you to avoid many problems that may otherwise come to the forefront after your divorce.
One thing that I will take note of is that to draft a Buy-sell agreement that two should have an attorney to assist new. This is true not only of the business aspect but also in the divorce case itself. Having an attorney does not guarantee you a particular level of success. Still, it does provide you with the expertise and knowledge that are frequently necessary to draft complex paperwork such as buy-sell agreements and closing documents in your divorce.
What is a buy-sell agreement? A buy-sell deal is a document that allows you and any other owners of your business to work together to determine what events would require you or any other owner to sell your stake in the industry. Rather than deciding these events while they are occurring, you would be able to determine in advance which events should lead to The sale of someone’s share of the business. Often what can happen in a dramatic situation involving death, divorce, or disinterest in the business parties will not agree to much. Then you all wind up in court having to litigate over these issues.
Additionally, having a plan before dramatic events occur also allows you to bypass The necessity to make those choices while going through The event itself. Usually, we make better decisions when we are not under a great deal of stress and can think more clearly about whatever topic is at hand.
What language needs to be included in a buy-sell agreement?
There need to be specific provisions included in your buy-sell agreement no matter what type of business you operate. These provisions are essential to the success of the buy-sell agreement and the company’s future that you or another person may be selling a portion of. There are often conflicts of interest when one of your business partners attempts to sell their share of the business. A buy-sell agreement will consider these potential conflicts even if it seems unlikely that those events will occur.
For our purposes, the buy-sell agreement is most relevant in a situation involving a divorce. Since Texas is a Community property state, that means that your spouse may have a Community property interest in your business and your ownership interest in it; this is true even if your spouse had never worked a day of their life in the industry itself. We have already discussed how a buy-sell agreement can go a long way towards helping you and your business partners avoid having to go to court when it comes to selling shares of a business.
This is done with a requirement that you sell any Community property share of your business in a predetermined way. This will leave little doubt about how to sell the company as a predetermined price and method of sale will likely be arrived at within the buy-sell agreement. Once all the circumstances are already lined up for the two of you, there will be little question about how to sell the business.
What are the different methods that could be employed in a buy-sell agreement?
Whether it is related to a divorce or not, one of the most significant sources of argument that can come up among you and your partners in the business is how to value one of your interests. The value of that ownership interest will determine Much to then sell the company for. Once you have agreed on how the purchase price in a buyout will be determined in advance of your divorce, you all can avoid so much conflict and potential for litigation. Working with professionals in the field of business valuation in addition to your attorney will be invaluable.
Given that Texas is such a favorable state to conduct business in, you likely chose to open your own business here for several reasons. Our form’s lack of corporate and individual income taxes probably motivated me to open a company in the Lone Star State. Because so many people in Texas own small businesses, they are frequently a source of significant contention in a divorce case. Protecting your business from your spouse in a contested divorce is an issue you can prepare for through a buy-sell agreement. The formation documents in your business may even protect your share of the company from your spouse through a modified or outright buy-sell agreement.
The issue is that it is not settled how effective these sort of formation document provisions can be in shielding your share of a business in a divorce. Some of these formation documents specifically stated what valuation methods would be employed and a specific value for the company’s share. So long as the valuation methods stated in the formation documents have been utilized consistently and by the terms of the formation documents, it is likely that the formation documents will be enforceable on the divorce.
Suppose you are creating a business and are interested in inserting this type of language into the formation documents for your business. In that case, you should be careful to look out for a couple of things. First, you need to define when the provisions related to divorce go into effect. For example, having general language related to the divorce included in the formation documents really won’t provide you with many benefits. It would be best to include a specific period in which the valuation provisions would go into effect. For example, stating that the divorce provisions go into effect once a divorce is filed would provide the specificity necessary to bind your spouse to this agreement.
Potential problems under buy-sell agreements
If your buy-sell agreement was drafted many years ago, you might want to go back and look at it to determine whether or not it still holds up over the many years since it has been drafted. Simply having a buy-sell agreement in place doesn’t mean that it will stand up to scrutiny as you begin a divorce case in 2021 or 2022. I’m willing to bet that either your family or your business has changed since the time your buy-sell agreement was created. While this may not be a helpful piece of information as you stare down a divorce, it may be beneficial if you are currently not actively involved in a divorce. Go back and look at your agreement and run it past an attorney to see if it needs to be updated.
I have also encountered situations where people have used general, boilerplate language in a buy-sell agreement and applied it to their family and business. However, every business owner has unique aspects to their operation that will require you to tailor your buy-sell agreement to your specific circumstances. It is a good idea for you to seek advice from attorneys and your business advisors, investment advisors, and your CPA or tax professional. If you draft an agreement that is not understandable, then you likely do not have an enforceable agreement.
Another factor that I would look to is whether or not your buy-sell agreement restricts who you can transfer your shares of the business to at the time of divorce. As mentioned earlier in today’s blog post, your business partners do not want to work with your spouse only because of a divorce. This is the essence of a buy-sell agreement. Nobody benefits if your community property interests are transferred to a disinterested spouse at the time of your divorce. However, you should consider if you are too restrictive with whom your share of the business can be transferred. An overly restrictive buy-sell agreement can lead to problems of its own.
Although we have talked about divorce primarily in this blog post, there are several reasons why a buy-sell agreement may make sense for you and your business. Death, bankruptcy, and a host of other events may be relevant to include in your buy-sell agreement. One factor that I think is interesting to consider is your disinterest in you. Even before your divorce, you may want to consider having disinterest be a provision included in your buy-sell agreement. This way, you won’t have to remain in the business or be concerned about what happens to your business if you become disinterested in operating the company with your partners.
You may also want to explore what can happen regarding your ability to reacquire your business once your divorce is over with period for example, would you be able to have your interest in the corporation held in trust for some time after your divorce to allow you to get back on your feet and be positioned to purchase your shares of the company? This may not be something that you’re interested in now, but it may interest you six months from now when your divorce is done and over with. The preferences of your business partners and your spouse’s willingness when drafting the buy-sell agreement are all relevant factors to consider.
Next, I would pay close attention to the method by which you are valuing your business in the buy-sell agreement. In divorce court orders, I always recommend that the language utilized to be as transparent as possible. This way, you and your opposing party can understand the expectations of each of you. The simple truth is that court orders that are not clear are also not enforceable. The same general principle applies to buy-sell agreements.
You want it to be crystal clear exactly how your business should be valued if one of these circumstances arises where you are made to sell your company shares. You need to arrive at a predictable and straightforward method that is spelled out in the agreement. Fixed prices, appraisals, and formulas are the norm in buy-sell contracts. However, the plan you chose to employ when the buy-sell contract was created may no longer be equitable or fair. With that said, you should consider reviewing and, if necessary, updating the methodology used. For instance, creating a situation where appraisals are conducted semi-annually may be a smart move for you and your family.
Finally, it is common in divorce scenarios for you to have an issue with cash flow. You may be in a position where you have to fund various aspects of your business; you’re divorced, child support, and spousal support. This puts you on the hook in many regards and can stretch your budget relatively thin. Any person purchasing your shares of the business may also have cash flow constraints of their own. It would be best if you considered the available cash of any buyer before agreeing to a sale. It may be that the potential buyer with the most amount of money on hand is the most attractive to you, even if someone else offers you more money in the aggregate.
Closing thoughts on buy-sell agreements in divorce cases
When it comes to your divorce, protecting yourself and your business are often treated the same. With that said, you need to understand the risk to you and your business in the context of a divorce. It would help if you did not consider your divorce circumstances as being only influenced by your business. Instead, the impact of your divorce on the company needs to be discussed with your advisors and with your business partners. Keeping everyone in the loop and communicating effectively is a crucial Part 2 doing what is best for your business and being fair with all parties involved.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultation six days a week in person, over the phone, and via video. These consultations are an excellent way for you to learn more about the world of Texas family law and how your family circumstances may be impacted by the filing of a divorce or child custody case.