Buy-Sell Agreement FAQ

Questions:

• When does a business need a buy-sell agreement?
• A buy-sell agreement is used for buying and selling businesses, right?
• If a co-owner of a business divorces, can the former spouse ask for part ownership in the business?
• Can a co-owner's personal bankruptcy affect the business?
• What's the best way to value a company when an owner is being bought out?
• What happens if a company needs to, but can't afford to, buy out one of its owners?
• Can a buy-sell agreement be used to avoid estate taxes?

Answer:

If a co-owner of a business divorces, can the former spouse ask for part ownership in the business?

In some states, yes, and the former spouse can succeed in getting it, too. In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), all earnings during marriage and all property acquired with those earnings are considered community property, owned equally by husband and wife. When property is divided during a divorce, each spouse can claim a right to all community property.

Even in non-community property states, a spouse could argue for a partial interest in the business, because marital property laws require property to be divided equitably during divorce.

To avoid this prospect, a good buyout or buy-sell agreement requires the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the company or the other co-owners, according to a valuation method provided in the agreement.