The recession topic is garnering so much public attention on the news and in social media, it could become a self-fulfilling prophecy—particularly if enough people believe it’s going to happen and then pull their investments out or slow their spending. Indicators, such as the recent inversion of the yield curve (which has accurately predicted all U.S. recessions in the last 60 years) are pointing toward a possible recession.
You can put an end to your recession doom-and-gloom fears by planning and getting peace of mind for your business. One way to do that is to ensure your business’s succession planning includes a buy-sell agreement with a bankruptcy provision or a restriction on transferability provision that contemplates an involuntary sale such as bankruptcy.
When no buy-sell agreement exists, and a business is co-owned by multiple people, if one of the owners or investors files for bankruptcy, then a bankruptcy trustee could seize that investor’s interest in the business (i.e., stock or membership interest) to pay off their bankruptcy debt—potentially resulting in disruption to the business’s operations while it’s tied up in bankruptcy court, sale to an unintended owner, or the liquidation of the business.
One way we protect our client’s business from this possibility is to ensure there is a bankruptcy provision or restrictions on transferability provision in the business’s buy-sell agreement. This provision should include, for example, the following:
- a well thought out restriction on transferability section
- address encumbrances and involuntary sales
- define transfers of economic interests versus voting and managing interests
- include a right of first refusal for sales or transfer of business interests.
These provisions would be triggered when any co-owner faces bankruptcy and would require them to notify the other owners and the company before filing. In that event, the other owners can decide whether to buy the bankrupt owner’s share in the business at fair market value (keeping the business intact and out of bankruptcy court). Alternatively, the buy-sell agreement may allow the company to redeem or buy-back the bankrupt owner’s shares. Some buy-sell agreements even permit a bankrupt owner to sell his interest in the company to a third party, often with the approval of a majority or all the remaining owners. Specific language regarding this provision must be precise to be effective.
Along with adding bankruptcy triggers, we can add other triggering events within the provision, such as death, divorce, or specific actions taken by a shareholder that may jeopardize the business’s operations or value. When any such trigger occurs, the agreement specifies the company’s and the co-owners’ rights relating to the triggering owner’s business interest.
Talk of a looming recession doesn’t have to signal a financial or business crisis, especially when business clients enter a recession prepared. As trusted advisors, McDonough Law LLC is committed in helping their clients anticipate and plan for potential events that could impact their businesses.
Contact McDonough Law LLC at 970-776-3311 today to schedule your free consultation.