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How To Divorce-Proof Your Business: Buy-Sell Agreements

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Part 3 in an ongoing series about keeping your business assets safe in the event of divorce. Part 1 can be found here. Part 2 can be found here.

There are a number of things that you can do at the "entity" level of your business that could prevent your husband from keeping an ownership interest in your business.

Buy-Sell Agreements - Almost every business that has two or more owners has, or should have, a buy-sell agreement in place (if you don't, you need to get this taken care of ASAP!)

A well-drafted buy-sell agreement will determine exactly how, and under what terms and conditions, the transfer of an ownership interest in the business will take place, if and when, certain "triggering events" occur, such as the death, disability, departure (quits, gets fired, retires) or, for our purposes, the divorce of one of the owners.

Since the ownership interests in a closely held business are fairly illiquid, a well-drafted buy-sell agreement should provide for:

• a market for the sale and/or purchase of those ownership interests
• a mechanism to determine the price, terms and conditions for the sale and/or purchase of those ownership interests
• the source of funds for the purchase of any ownership interests (life or disability insurance, a sinking fund, cash on hand, line-of-credit or a loan, a combination thereof, etc.).

In addition, a buy-sell agreement can (and often should) do the following:

• prohibit an owner (or his/her estate) from transferring and/or selling any ownership interests to third parties without the prior written consent of the other owners
• restrict the ownership of any interest in the business to an existing group
• automatically convert the ownership interest into a non-voting interest upon a triggering event
• provide the business and/or other owners with the mandatory right or right-of- first-refusal to buy the ownership interests from any departing owner, the estate of a deceased owner or the ex-spouse of a current or departed owner
• require all owners to have an acceptable prenuptial agreement in place before marriage or remarriage that would require that owner's soon-to-be-spouse to waive any and all rights to any ownership interest in the business in the event of a future divorce.

Operating Agreement/Partnership Agreement/Shareholders Agreement - For our purposes, all of these agreements are synonymous. In general, Operating Agreements are used with Limited Liability Companies, Partnership Agreements are used with Partnerships, including Limited Partnerships and Shareholder Agreements are used for C and S Corporations.

The purpose of these agreements is to formalize the understanding between you and the other owners as to how the business will be owned and managed. Even though it is not a legal requirement for your business to have such an agreement, it certainly makes good business sense to do so. Without having some type of operating agreement in place, your business might be forced to operate in accordance with your home state's default operating requirements. Wouldn't you rather manage and operate your business the way you want to, instead of the way your state has pre-decided?

In addition, a well-drafted agreement will stipulate what is expected of each owner; how profits and losses are assigned; procedures for transferring, buying and/or selling ownership interests; and just about anything else you want it to say, including restrictions on the ability of ex-spouses of owners to have any ownership interests whatsoever in the business.

In most cases, the buy-sell language is either included in the operating/partnership/shareholders agreement or it is contained in a separate buy-sell agreement.

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Jeffrey A. Landers, CDFA™ is a Divorce Financial Strategist™ and the founder of Bedrock Divorce Advisors, LLC (http://www.BedrockDivorce.com), a divorce financial strategy firm that exclusively works with women, who are going through, or might be going through, a financially complicated divorce. He also advises women business owners on what steps they can take now to "divorce-proof" their business in the event of a future divorce. He can be reached at Landers@BedrockDivorce.com.

All articles/blog posts are for informational purposes only, and do not constitute legal advice. If you require legal advice, retain a lawyer licensed in your jurisdiction. The opinions expressed are solely those of the author, who is not an attorney.