{"id":11092,"date":"2018-11-03T17:21:30","date_gmt":"2018-11-04T00:21:30","guid":{"rendered":"https:\/\/www.keytlaw.com\/azllclaw\/?page_id=11092"},"modified":"2018-11-11T15:07:13","modified_gmt":"2018-11-11T22:07:13","slug":"bs","status":"publish","type":"page","link":"https:\/\/www.keytlaw.com\/azllclaw\/bs\/","title":{"rendered":"What You Need to Know about LLC Buy Sell Agreements"},"content":{"rendered":"

by Richard Keyt<\/a> and Richard C. Keyt<\/a>, Arizona LLC attorneys who have formed 10,000+ Arizona LLCs and have 406 five-star reviews on Google, Facebook & Birdeye<\/a><\/p>\n

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.\u00a0 Like marriages, over fifty percent of multi-member LLCs reach a point where the members need to split up.\u00a0 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.\u00a0 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:<\/p>\n

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  1. The members agree on how one member will terminate the member’s membership interest, i.e., a mutual and agreeable company divorce.<\/li>\n
  2. One or more members files a lawsuit and asks an Arizona superior court to dissolve the LLC.\u00a0 This is expensive for all the parties and will terminate the LLC’s business.\u00a0 Termination is a financial disaster for a successful business and a big economic loss for all of the members.<\/li>\n
  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.<\/li>\n<\/ol>\n

    Warning<\/strong>:\u00a0 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.<\/p>\n

    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<\/del> must have a comprehensive Buy Sell Agreement.\u00a0 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.<\/p>\n

    Articles & Information about Buy Sell Agreements<\/strong><\/p>\n

    Click on the plus + symbol below to open a toggle and read more about an article.<\/p>\n<\/div><\/div><\/div><\/div><\/div>

    <\/i><\/i><\/span>To Hire the Keyts to Prepare a Buy Sell Agreement Complete our Questionnaire<\/span><\/a><\/h4><\/div>
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    Click here to go to the Keyt’s Buy Sell Agreement questionnaire<\/a>.<\/p>\n

    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.\u00a0 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.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>A Multi-Member LLC\u2019s Most Important Document<\/span><\/a><\/h4><\/div>
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    Click here to read this article<\/a>.<\/span><\/p>\n

    The incidence of business divorces is much greater than marriage divorces.\u00a0 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.\u00a0 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.\u00a0 This article explains what a Buy Sell Agreement does and how it contains the members\u2019 exit strategy that saves the members big bucks and eliminates a nasty & expensive company divorces.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>Take the Test to Determine if Your Buy Sell Agreement Sucks<\/span><\/a><\/h4><\/div>
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    Click here to read the article<\/a>.<\/p>\n

    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.\u00a0 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.\u00a0 Don’t wait until after a triggering event occurs that your Buy Sell Agreement sucks.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>See Our List of 17 Optional Triggering Events that Can Start a Buy Out<\/span><\/a><\/h4><\/div>
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    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.<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t
    Triggering Event<\/center><\/th>
    Purpose<\/center><\/th>\n<\/tr>\n<\/thead>\n
    1. Any event the members desire<\/td>A 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.<\/td>\n<\/tr>\n
    2. Operating Agreement default<\/td>If a member defaults under the Operating Agreement signed by all of the members the LLC has an option to buy out the defaulting member.<\/td>\n<\/tr>\n
    3. Member fails to contribute money or property<\/td>This 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.<\/td>\n<\/tr>\n
    4. Death of a member<\/td>The 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.<\/td>\n<\/tr>\n
    5. Member is convicted of a felony<\/td>Many LLC members do not want to have another member who has been convicted of a felony.<\/td>\n<\/tr>\n
    6. Divorce of a member<\/td>Prevents 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.<\/td>\n<\/tr>\n
    7. Member files for bankruptcy<\/td>If 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.<\/td>\n<\/tr>\n
    8. Member transfers all or part of the member's membership interest without the approval of the other members<\/td>The 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.<\/td>\n<\/tr>\n
    9. Termination of employment of a member<\/td>Applies 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.<\/td>\n<\/tr>\n
    10. Member loses his or her professional license<\/td>Commonly 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.<\/td>\n<\/tr>\n
    11. Majority member sells membership interest<\/td>\"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.<\/td>\n<\/tr>\n
    12. Majority member sells membership interest<\/td>\"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.<\/td>\n<\/tr>\n
    13. Member is disabled<\/td>Used to acquire the interest of a member who become permanently disabled and unable to provide needed services for the LLC.<\/td>\n<\/tr>\n
    14. Member retires<\/td>Members sometimes want to retire, but without a Buy Sell Agreement that provides for a retirement purchase, it probably will not happen.<\/td>\n<\/tr>\n
    15. Member is incompetent<\/td>Applies if a member loses his or her mental capacity and a court appoints a conservator to manage the members financial affair.<\/td>\n<\/tr>\n
    16. Member files a false document with the ACC<\/td>If 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,<\/td>\n<\/tr>\n
    17. Member causes somebody to be added or removed from the LLC's bank account<\/td>If 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.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>Why Members of a Multi-Member LLC are Crazy if They Don\u2019t Sign a Buy Sell Agreement<\/span><\/a><\/h4><\/div>
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    Click on this link to get the article<\/a>.<\/p>\n

    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.\u00a0 To learn more about this important topic read this article.<\/span><\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>Buy Sell Agreements Should Avoid Fixed Price Valuation Methods Like the Plague<\/span><\/a><\/h4><\/div>
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    Click here to read this article<\/a>.<\/a><\/p>\n

    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.\u00a0 When used, the purchase price of a membership interest is based on the stated value agreed on in advance by the members.\u00a0 Read why you should never use the fixed value method to determine the value of a membership interest under a Buy Sell Agreement.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>What is a Shot Gun Buy Out Clause & Why Should It be in Your Buy Sell Agreement?<\/span><\/a><\/h4><\/div>
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    Click here to read this article<\/a>.<\/p>\n

    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.\u00a0 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.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>The Ideal Time to Review Your Buy-Sell Agreement<\/span><\/a><\/h4><\/div>
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    Click here to read this article<\/a>.<\/p>\n

    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.\u00a0 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.\u00a0 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.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>Funding a Buy-Sell Agreement With Life Insurance<\/span><\/a><\/h4><\/div>
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    Click here to read this article<\/a>.<\/p>\n

    Learn how the to fund the purchase of a member’s interest in an LLC with life insurance.\u00a0 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.<\/p>\n<\/div><\/div><\/div>

    <\/i><\/i><\/span>Excellent Buy Sell Agreement Articles by Appraiser Chris Mercer<\/span><\/a><\/h4><\/div>
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    Chris Mercer<\/a> 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.\u00a0 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.\u00a0 Chris has the following professional designations:<\/p>\n