When business partners start a company together, they may not want to think about what could happen to their enterprise if one of them dies or gets divorced. Attorneys and accountants advise their clients to be prudent and create a buy-sell agreement that will help to ensure that a stake in the business doesn't fall into unwelcome hands.
Buy-sell agreements typically stipulate how a company will be valued and how an owner's stake will be handled in the event of death, divorce and also bankruptcy or disability.
If there's no buy-sell agreement and one of the owners dies, their stake can pass to their heirs — and the remaining original owner or owners may get one or more new partners they didn't bargain for.
In the event of a divorce, without a buy-sell agreement an estranged spouse could claim a portion of an owner's stake. But a well-drafted agreement can prevent this by requiring a spouse to sell any stake received in a divorce settlement. In many cases, either the divorcing owner will have to buy out their spouse, or the business partners will have to do so.
When an owner divorces, a buy-sell agreement may need to be approved by the judge handling the case. Judges can disregard agreements if it appears they grossly undervalued a company or were otherwise unfair to an estranged spouse.
In such cases, rather than have a company sold or shut down, a judge may order a divorcing spouse to compensate their soon-to-be-ex with cash or other property.
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