What You Need to Know about LLC Buy Sell Agreements

What You Need to Know about LLC Buy Sell Agreements2018-11-11T15:07:13+00:00

by Richard Keyt and Richard C. Keyt, Arizona LLC attorneys who have formed 6,200+ Arizona LLCs and have 138 five star reviews on Google, Facebook & Birdeye

As LLC attorneys one of the most common problems LLC members ask us to resolve is their need for what we call an LLC divorce.  Like marriages, over fifty percent of multi-member LLCs reach a point where the members need to split up.  An LLC divorce is any situation in which one or more members of a multi-member LLC need to buy out the membership interest of one or more other members.  If a multi-member LLC lacks a Buy Sell Agreement then when the need for a company divorce arises the members will be stuck with each other forever unless one of the solutions applies:

  1. The members agree on how one member will terminate the member’s membership interest, i.e., a mutual and agreeable company divorce.
  2. One or more members files a lawsuit and asks an Arizona superior court to dissolve the LLC.  This is expensive for all the parties and will terminate the LLC’s business.  Termination is a financial disaster for a successful business and a big economic loss for all of the members.
  3. The members signed a Buy Sell Agreement that contains a triggering event that gives one member or the company the right to buy the entire membership interest of another member.

Warning:  If your LLC doesn’t have a comprehensive buy sell agreement then your members many not be able to consummate a company divorce without killing the business.

We have a series of articles listed below that will educate you about Buy Sell Agreements and why all multi-member LLCs that have substantial assets or a successful business need must have a comprehensive Buy Sell Agreement.  When you start a multi-member LLC you owe it to yourself and the other members to protect everybody by having all the members sign a comprehensive Buy Sell Agreement.

Articles & Information about Buy Sell Agreements

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Click here to go to the Keyt’s Buy Sell Agreement questionnaire.

This questionnaire collects the information the Keyts need to prepare a state-of-the-art comprehensive Buy Sell Agreement for your multi-member Arizona LLC.  Take a quick look at the questionnaire to see the large number of options you can select from that gives you complete control over the customization specifically for your LLC.

Click here to read this article.

The incidence of business divorces is much greater than marriage divorces.  I recommend without exception that every LLC that has two or more owners (other than a husband and wife owned LLC) have an exit strategy (also called a business pre-nuptial agreement) called a Buy-Sell Agreement.  If the owners of a multiple member LLC do not enter into a Buy Sell Agreement when they form their LLC, it is unlikely they will ever do so and the consequences can cost the members big bucks plus extreme mental anguish.  This article explains what a Buy Sell Agreement does and how it contains the members’ exit strategy that saves the members big bucks and eliminates a nasty & expensive company divorces.

Click here to read the article.

If you are a party to a Buy Sell Agreement or an Operating Agreement that has buy out provisions you owe it to yourself to take this test to find out if your agreement sucks and needs to be replaced.  Most Buy Sell Agreements are prepared by people, including lawyers, who don’t understand the complex legal issues that are needed to have a comprehensive Buy Sell Agreement that does what the members of the LLC want it to do.  Don’t wait until after a triggering event occurs that your Buy Sell Agreement sucks.

When you hire us to prepare your Buy Sell Agreement we will ask you to add or delete triggering events from our long list of possible events that could start a buy out of a member’s interest in your LLC.

Triggering Event
Purpose
1. Any event the members desireA Buy Sell Agreement can include any triggering events that are important to the members. For example, the members could agree that if the New York Yankees win the World Series, member 1 must sell to member 2 for $100.
2. Operating Agreement defaultIf a member defaults under the Operating Agreement signed by all of the members the LLC has an option to buy out the defaulting member.
3. Member fails to contribute money or propertyThis provision encourages a member to satisfy the member's obligation in a written document to pay money or assign property to the company because if the member fails to satisfy that obligation the LLC will have an option to buy out the defaulting member.
4. Death of a memberThe LLC or surviving members have an option to purchase the interest of a deceased member. The Buy Sell Agreement can also require the LLC to buy-out a deceased member. These types of buy outs can be funded with life insure on the lives of members.
5. Member is convicted of a felonyMany LLC members do not want to have another member who has been convicted of a felony.
6. Divorce of a memberPrevents the wrong spouse from acquiring an interest in the LLC if two members own their interest as community property and they get divorced and the wrong spouse becomes the sole owner of all or a portion of the membership interest.
7. Member files for bankruptcyIf a member loses the member's interest in the LLC because of filing for bankruptcy, the company and other members should be able to buy the interest from the creditor who acquires it out of the bankruptcy.
8. Member transfers all or part of the member's membership interest without the approval of the other membersThe Buy Sell Agreement provides that a member may not transfer or encumber all or any interest in the member's interest in the company without the approval of the members and compliance with the terms and conditions of the Operating Agreement and/or the Buy Sell Agreement. If a member violates the no transfer/encumbrance provisions, the LLC should have an option to acquire the interest of the defaulting member, perhaps at an amount less than the fair market value of the interest.
9. Termination of employment of a memberApplies only to a member who is employed full time by the LLC. Especially important when the employee is a minority member and should only own an interest while employed.
10. Member loses his or her professional licenseCommonly used for LLC's that are owned by members who must be licensed in a particular area. For example, the Buy Sell Agreement of an LLC owned by physicians might give the LLC and other members an option to acquire the interest of a physician/member who loses his or her license to practice medicine.
11. Majority member sells membership interest"Drag Along" provision: Majority member has the option to require minority members to sell their interests in the LLC if the majority member sells. The sale of the minority members' interests are on the same terms and conditions as the sale of the majority member's interest.
12. Majority member sells membership interest"Tag Along" provision: Minority members have the option to require the majority member to include the sale of the minority members' interests in the LLC if the majority member intends to sell. The sale of the minority members' interests must be on the same terms and conditions as the sale of the majority member's interest.
13. Member is disabledUsed to acquire the interest of a member who become permanently disabled and unable to provide needed services for the LLC.
14. Member retiresMembers sometimes want to retire, but without a Buy Sell Agreement that provides for a retirement purchase, it probably will not happen.
15. Member is incompetentApplies if a member loses his or her mental capacity and a court appoints a conservator to manage the members financial affair.
16. Member files a false document with the ACCIf a member causes a false document to be filed with the Arizona Corporation Commission it is a triggering event that can cause a buy out,
17. Member causes somebody to be added or removed from the LLC's bank accountIf a member causes a signer to be added or removed on the company's bank account without the approval of the members per the operating agreement it is a triggering event that can cause a buy out.

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In practicing LLC law since 1992 I have seen far too many expensive multi-member LLC disasters that could have been avoided if the members of the LLC had signed a comprehensive Buy Sell Agreement or an Operating Agreement that had buy out provisions.  To learn more about this important topic read this article.

Click here to read this article.

A popular method of valuing the membership interest of a member who membership interest is being purchased under a Buy Sell Agreement is the “fixed value” method.  When used, the purchase price of a membership interest is based on the stated value agreed on in advance by the members.  Read why you should never use the fixed value method to determine the value of a membership interest under a Buy Sell Agreement.

Click here to read this article.

Learn about the shot gun buy out clause and how it can be the exit strategy when members of an LLC need to consummate a company divorce.  When the clause is exercised it results in one member of the LLC buying out the entire membership interest of another member, which is what I call a company divorce.

Click here to read this article.

If your multi-member LLC has a Buy Sell Agreement or buy sell provisions in its Operating Agreement the members owe it to themselves to review the buy sell.  The biggest mistake members of a multi-member LLC make after signing a Buy Sell Agreement or an Operating Agreement that has buy sell provisions is they put the agreement in a drawer and never review it to make sure it works as intended.  If your LLC has a Buy Sell Agreement or an Operating Agreement with buy sell provisions, please have it reviewed by an LLC attorney who understands and has substantial experience with buy sell agreements.

Click here to read this article.

Learn how the to fund the purchase of a member’s interest in an LLC with life insurance.  This is a great way to make sure the family of a deceased member will get paid in full after the death of their loved one who was a party to a Buy Sell Agreement that required the company or other members to buy the interest of the deceased member.

Chris Mercer is my number one choice for the person companies should hire to value stock and membership interests when the companies have a Buy Sell Agreement.  Unless my clients say no I make Chris Mercer the person named in the Buy Sell Agreements I prepare to appraise the value of a membership when there is a buy out.  Chris has the following professional designations:

  • Chartered Financial Analyst (The CFA Institute)
  • Accredited Senior Appraiser, Fellow (The American Society of Appraisers)
  • Accredited in Business Appraisal Review (The National Association of Certified Valuators and Analysts)

See Chris’ great blog about Buy Sell Agreements.

Here are some of Chris’ great and informative articles I recommend you read to learn more about the importance of Buy Sell Agreements:

The Six Defining Valuation Elements of a Process Buy-Sell Agreement

Process buy-sell agreements are buy-sell agreements involving the use of one or more business appraisers in processes specified for determining value. Mercer Capital professionals have been involved in many valuation processes for determining price (valuations) for buy-sell agreements.

Characteristics of a Good Buy-Sell Agreement

The creation of buy-sell agreements involves a certain amount of future-thinking. The parties must think about what could, might, or will happen and write an agreement that will work for all sides in the event an agreement is triggered at some unknown time in the future. This article addresses the important characteristics of buy-sell agreements that are important for business owners and for attorneys advising them.

Recommended Valuation Process for Buy-Sell Agreements: Single Appraiser – Select Now, Value Now

The Single Appraiser, Select Now and Value Now buy-sell agreement valuation process is the one I recommend for most successful closely held and family businesses. I prefer this single appraiser process as the best available alternative for fixed-price, formula, and multiple appraiser agreements.

Your Buy-Sell Agreement: Ticking Time Bomb or Reasonable Resolution?

Buy-sell agreements exist in many, if not most, closely held businesses having substantial size and/or value. And they exist between corporate joint venture partners in many thousands of enterprises.

$11 Million or $178 Thousand? New Jersey Appellate Court Upholds Book Value in Buy-Sell Agreement

Booth Computers, a New Jersey family partnership was created in 1976, and in 1978, a related partnership, HCMJ Realty Ltd. was formed, of which Booth was a limited partner. Interests in Booth were given to James, Michael and Claudia Cohen by their father, Robert. A 2011 case tells the story of how the Cohen children obtained their interests, and how Booth and at least one related partnership of which Booth was a limited partner, acquired substantial assets.

Out of the File Cabinet: The Ideal Time to Review Your Buy-Sell Agreement

Most business owners do not have a current understanding of the details and potential pitfalls that lurk within their own buy-sell agreements. Most view these agreements as obligatory legal documents that can be forgotten about until needed. Unfortunately, when a buy-sell agreement is needed it is too late to fix any problems within the agreement.

Buy-Sell Agreements: Two and a Tie-Breaker

Many buy-sell agreement templates call for an appraisal process to resolve the price (i.e., the valuation) for transactions under companies’ agreements upon the occurrence of specified trigger events. We call such agreements process agreements. Quite often, the descriptions of the valuation processes are quite short.

Often Overlooked Yet Important Items in Process Buy-Sell Agreements

Several other issues related to valuation should appropriately be addressed in your buy-sell agreements. The following discussion is by no means exhaustive, but includes items that are helpful in minimizing problems or uncertainties with the operation of process buy-sell agreements.

Life Insurance Proceeds in Valuation for Buy-Sell Agreements

Many buy-sell agreements are funded, in whole or in part, by life insurance on the lives of individual shareholders, who may be key managers, as well. Life insurance is a tidy solution for funding when it is available and affordable. It is important, however, to think through the implications of life insurance from a valuation perspective whether you are a valuation expert, a business owner or both.

The Level of Value: Why Estate Planners Need to Understand This Critical Valuation Element of a Buy Sell Agreement

Business appraisers retained pursuant to the operation of buy-sell agreements are normally bound to prepare their valuations in accordance with the kind of value described or defined within the agreements. Confusion over an appraiser’s basis of value, either by appraisers or by users of appraisal reports, can lead to the placing of inappropriately high or low values for a buy-sell agreement transaction. Therefore, it is essential that business appraisers and the parties using appraisals are aware of the correct basis (level) of value.

Buy Chris Mercer’s Book

I purchased Chris’ book called “Buy-Sell Agreements for Closely Held and Family Business Owners or How to Know Your Agreement Will Work  Without Triggering It” for $25.  I highly recommend this excellent book.

Hire the Keyts to Prepare a Buy Sell Agreement

We prepare Buy Sell Agreements custom drafted specifically to meet the desires of the members of Arizona LLCs.  Our Buy Sell Agreement is the end result of Richard Keyt preparing this type of business agreement many times since practicing law in Arizona since 1980.

We have three prices for our custom drafted Buy Sell Agreement.  The prices are:
  • $897 if we formed the LLC within the last 90 days
  • $1,497 if we formed the LLC more than 90 days ago or if we did not form the LLC
  • $1,394 if you purchase a Buy Sell Agreement for $897 and a new or amended Operating Agreement for $497.

Here’s the sequence of events when somebody hires us to prepare a Buy Sell Agreement for their Arizona LLC:

1. The purchaser completes and submits our online Buy Sell Agreement Questionnaire.

2. The purchaser pays for the Buy Sell Agreement with a credit card in our secure online store at one of the following links:

a. $897 Buy Sell Agreement Order Form if we formed the LLC within the last 90 days.

b. $1,497 Buy Sell Agreement Order Form if we formed the LLC more than 90 days ago or if we did not form the LLC.

c. $1,394 Buy Sell Agreement & Operating Agreement Order Form if we did not form the LLC and you are purchasing a Buy Sell Agreement and an Operating Agreement.

You can also pay by or by calling my legal assistant Kate Keyt - 480-664-7846 and giving your credit card information over the phone or by sending a check payable to KEYTLaw, LLC, 7373 E. Doubletree Ranch Road, Suite 165, Scottsdale, Arizona 85258.

3. After paying and completing our Questionnaire Richard Keyt will prepare the Buy Sell Agreement within 3 – 5 business days and email it to the LLC’s contact person along with a letter of explanation. These documents are in digital (pdf) format for distribution to all members for their review and input.

4. Members review the Buy Sell Agreement, mark text to be changed and make a list of questions about provisions and additional issues to ask KEYTLaw business and contracts attorney and former CPA Richard C Keyt. The members can email their changes to Richard or call Richard at 480-664-7472 and schedule a phone conference or a conference at our office for Ricky to answer questions about the BSA and determine what changes, if any, the members want to make to the BSA.  The BSA comes with one hour of attorney time to discuss the agreement with the members and modify it per the members’ instructions at the meeting. Attorney time incurred beyond one hour will be charged at $295/hour.

5.  Richard C. Keyt will revise the Buy Sell Agreement and send it to the contact person as an Adobe pdf file for the signatures of the members. Ricky will also send a pdf version of the agreement that shows the changes we made to the first draft of the BSA.

6. Members can sign the agreement the old fashioned way or we can arrange for digital signatures for no additional cost.

We constantly tell members of multi-member LLCs that the most important company document is the company’s Buy Sell Agreement because it is the only way to plan for the orderly future “divorce” of a member. Without a Buy Sell Agreement, the members are stuck with each other forever unless they are fortunate to agree on who will go, who will stay and how much, if any, the remaining members will pay the selling member.

Our Fee Includes Attorney Consultation & Revision Time

Our fee includes one hour of attorney time conferring with members, modifying the agreement and drafting custom provisions. Few of our LLCs exceed the allotted attorney time to finalize their Buy Sell Agreement. We want the final agreement to contain all of the provisions desired by the members of each LLC. Some LLCs need more custom drafting of provisions for the Operating Agreement or need more conference time with members to discuss the agreement and make changes. We bill the LLC for any excess attorney time at $295 per hour.

How to Hire the Keyts to Form Your New LLC

To hire us to form your Arizona LLC compare the contents of our three LLC packages ($397 Bronze, $597 Silver & $997 Gold [the confidential LLC]) and complete our LLC Formation Questionnaire.