E. What If an Owner Divorces?

PROVIDING THE RIGHT TO FORCE BUYOUTS



agreement. Mike and Marti dread being in

business with Betsy, who has a dozen reasons

to be mad at Mike and, by extension, his

friends. Without a buy-sell agreement, Mike

and Marti have no way to force her to sell her

interest and, as a result, they eventually disband the company.

A “contemplation-of-divorce” buy-sell provision

protects the owners of the company from having

to work with potentially undesirable ex-spouses.

Under such a provision, the company and the

other owners can buy the ownership interest received by a former spouse if they choose, at the

price in the agreement. However, and this is a big

however, an ex-spouse cannot be required to sell

back his interest if he did not sign the buy-sell

agreement.

To avoid this prospect, all of the married owners

should have their spouses read and sign the buysell agreement. By signing, the spouse explicitly

agrees to sell any interest received in a divorce

settlement back to the company or to the other

owners for the Agreement Price and to abide by

the terms of the buy-sell agreement that are applicable to all owners (if the company decides

not to buy back the interest from the ex-spouse).

Again, remember, contractual provisions

contained in a buy-sell agreement don’t have to

be binding if none of the parties want them to be.

Owners have flexible buy-sell agreements to

protect and define their rights, not to freeze them

in legal straitjackets. For example, suppose that,

despite a forced buyout provision, the remaining

owners actually like the ex-spouse—perhaps even

better than they ever liked their old business partner—and want her to join the business. As long

as she agrees, this is no problem, since, when all

parties agree, any agreement can be changed.

The language of the “contemplation of divorce”

clause contained in our buy-sell agreement, which

includes the options mentioned above, is shown

in Excerpt 8. Note that it gives the divorced owner



3/27



the first chance to buy back the interest awarded

by a court to his former spouse, then gives the

company and all owners (including the divorced

owner) a chance to buy the interest. We think this

makes sense—it allows the divorced owner to return to his status quo ownership position in the

company by buying the entire interest awarded

by the court back from his former spouse—if he

can afford it.



Worksheet. If you are interested in giving



the company and the continuing owners

the option to buy a former spouse’s ownership

interest, check Option 1 on your worksheet now.

(Section III, Scenario 4.)



Make Sure the Spouse Understands

What He’s Signing

In at least one case, the court refused to enforce

a provision in a buy-sell agreement requiring an

ex-spouse to sell back an interest received as

part of a divorce, even though the ex-spouse had

signed the agreement. The ex-spouse, who didn’t

work in the business or have a financial background, successfully argued that she never

understood the agreement (and that she wasn’t

represented by a lawyer). To avoid the possibility

of this happening, it’s a good idea to add to

your spousal provision an acknowledgment for

the spouse to sign agreeing that she has received

a copy of your company’s financial report, has

reviewed the agreement with a lawyer of her

own choosing and fully expects the agreement

to be binding in case of divorce. And if spouses

also prepare a pre- or post-marital agreement

defining their property ownership vis-à-vis each

other, make sure it contains the same provisions

as the buy-sell agreement regarding business

ownership.



3/ 2 8



BUY-SELL AGREEMENT HANDBOOK



Scenario 4. When an Owner’s Interest Is Transferred to His or Her Former Spouse

Option 1: Option of Company and Continuing Owners to Purchase Former

Spouse’s Interest

(a) If, in connection with the divorce or dissolution of the marriage of an owner, a court

issues a decree or order that transfers, confirms or awards part or all of an ownership

interest to a divorced owner’s former spouse, the former spouse is deemed to have offered

his or her newly acquired ownership interest to the divorced owner for purchase on the

date of the court award or settlement, according to the terms of this agreement. If the

divorced owner does not elect to make such purchase within 30 days of the date of the

court award or settlement, the former spouse of the divorced owner is deemed to have

offered his or her newly acquired ownership interest to the company and the co-owners

(including the divorced owner) for purchase, according to the terms of this agreement.

The divorced owner must send notice to the company, in writing, that his or her former

spouse now owns an ownership interest in the company. The notice shall state the name

and address of the owner, the name and address of the divorced owner’s former spouse, a

description and amount of the interest awarded to the former spouse and the date of the

court award. If no notice is received by the company from the divorced owner, an offer to

the company and the co-owners is deemed to have occurred when the company actually

receives notice orally or in writing of the court award or settlement transferring the

divorced owner’s interest to the owner’s former spouse. The company and the co-owners

(including the divorced owner) shall then have an option, but not an obligation (unless

otherwise stated in this agreement), to purchase all or part of the ownership interest

within the time and according to the procedure in Section IV, Provision 1 of this

agreement. The price to be paid, the manner of payments and other terms of the purchase

shall be according to Sections VI and VII of this agreement.

(b) A former spouse who sells his or her ownership interest back to the company or

continuing owners agrees to be responsible for any taxes owed on his or her sales

proceeds.



Excerpt 8



PROVIDING THE RIGHT TO FORCE BUYOUTS



F. What If an Owner Loses His or

Her Professional License?

So far we have covered the most common scenarios

that happen to the owners of small businesses. In

the rest of this chapter we deal with a few less likely

scenarios: loss of a license, personal bankruptcy of

an owner, default on a personal loan and expulsion.

First, let’s look at what happens if an owner loses

his professional or vocational license.

An owner can be prevented from working if he

loses a license that he needs to do his job. For

example, a veterinarian cannot legally treat

animals without a veterinarian’s license. What

happens if your co-owner loses his professional

or vocational license, preventing him from doing

his job? Does he have to offer his interest for sale

back to the company or to the still-licensed

owners? Even absent a buy-sell agreement, the

law of many states requires this for some professions (in California, for example, you can’t be a

partner in a law firm without being a licensed

lawyer). But even where this is true, the issues of

placing a value on the departing owner’s interest

and deciding on a mutually agreed method for

payment still need to be dealt with.



3/29



If you find this little scenario sobering, it’s

likely you’ll want to include loss of license in

your buyback scenarios, to require a co-owner

who has his license suspended or revoked to

relinquish his duties and sell his ownership interest back to the company or to the other owners.

This protects the owners of the company from

having to share profits with someone who can no

longer practice and may be in disrepute.

In addition, you may want to provide that the

company or the continuing owners can pay less

than full value for the interest of an owner who

has lost his license. For instance, your agreement

can allow the company or the remaining owners

to purchase the owner’s share at 40% to 50% of

the full agreement price—to allow for the possibility that the conduct that caused the co-owner

to lose his license may have hurt the reputation of

your business. Or, you may simply want to provide for a new appraisal of the company’s value

to establish its current worth. (We discuss the

procedure for getting an appraisal in Chapter 6.)

The language of the loss-of-license provision in

our agreement, with the price options we discussed,

is shown in Excerpt 9.

Worksheet. If you are interested in giving



EXAMPLE: Carol and Mike, friends from school,



start a professional corporation to engage in

the practice of architecture. After he starts to

drink heavily, Mike is found to have improperly

used a client’s funds. After a hearing, his

license is revoked by the state board. Since

Mike is no longer able to work, Carol demands

that Mike sell her his interest in the firm. When

Carol refuses to pay Mike’s asking price for his

ownership share, Mike files a lawsuit. Carol

countersues, claiming Mike deserves very little,

since his own wrongdoing greatly harmed the

practice’s reputation. While the likely outcome

is hard to call, one thing that’s sure is both

parties will rack up attorneys’ fees.



the company and the continuing owners

the option to buy the interest of an owner who

has lost a required professional license, check

Option 1 on your worksheet now. (Section III,

Scenario 5.) If you check Option 1, also:

• check Option 1a to use the regular Agreement Price as the price for the expelled

owner’s ownership interest, or

• check Option 1b to call for an appraisal of

the expelled owner’s ownership interest, or

• check Option 1c to use a discounted Agreement Price as the price for the expelled

owner’s ownership interest. If you check

Option 1c, also fill in the percentage

amount of the discount to be taken off the

Agreement Price, such as 50%.



3/ 3 0



BUY-SELL AGREEMENT HANDBOOK



Scenario 5. When an Owner Loses His or Her Professional License

Option 1: Option of Company and Continuing Owners to Purchase Interest of an Owner

Who Has Lost His or Her Professional License

(a) If an owner suffers the surrender, revocation or suspension, which will stand for at least

three months, of his or her license to perform services essential to the business purposes

of the company, that surrender, revocation or suspension of the license shall be deemed

to constitute an offer by the owner to sell his or her interest to the company or the other

owners. The owner shall notify the company in writing of such surrender, revocation or

suspension. The notice shall include the name and address of the owner, a description

and amount of the owner’s interest in the company and a description and effective date of

the decision that resulted in the surrender, revocation or suspension of the owner’s

license. If no notice is received by the company, an offer is deemed to have occurred

when the company actually learns of the decision to surrender, revoke or suspend the

owner’s license. The company and the continuing owners shall then have an option, but

not an obligation (unless otherwise stated in this agreement), to purchase all or part of the

ownership interest within the time and according to the procedure in Section IV,

Provision 1 of this agreement. The price to be paid shall be as specified in this section; if

not so specified, then according to Section VI of this agreement. The manner of payments

and other terms of the purchase shall be according to Section VII of this agreement.

(b) If an owner’s license is surrendered, revoked or suspended, the price that the company

and/or the continuing owners will pay for the expelled owner’s ownership interest will

be:

Option 1a: The full Agreement Price according to Section VI of this agreement

Option 1b: Decided by an independent appraisal, according to the Appraised Value

Method in Section VI of this agreement

Option 1c: The Agreement Price as established in Section VI of this agreement,

decreased by [insert percentage, such as “50%”] .

Excerpt 9