The Importance of Buy-Sell Provisions

Recently, a three-judge panel of the 10th District Court of Appeals highlighted the importance of ensuring that your business has an appropriate buy-sell provision. A buy-sell provision is a provision in an operating agreement that provides for how an owner’s share in the business is to be disposed of in the event of his or her death, disability, retirement, or lifetime sale. The purpose of these provisions is to ensure that the dead, disabled, retired, or outgoing partner’s share is satisfactorily paid for by the remaining business partners or the company. Often times, business partners will take out cross life insurance policies naming each other as the primary beneficiaries (cross-purchase). An alternative to this arrangement is to have the business own the life insurance or disability policies.

In Saxe v. Dlusky, 2010-Ohio-5323, business partners had ownership interests in two separate businesses. Unfortunately, there was only a buy-sell provision for one of the two businesses. Upon the death of Saxe, Dlusky applied the life insurance proceeds to Saxe’s widow for the purchase of Saxe’s share in the business. As for the business without the buy-sell provision, Dlusky, without ever having an appraisal done, simply offered Saxe’s widow $30,000 for Saxe’s ownership interest in the business. Less than a year later, Dlusky sold the same interest for $125,000.

Saxe’s widow sued Dlusky in federal court alleging SEC violations, breach of fiduciary duty, conversion, breach of contract, fraud, constructive fraud, and an accounting. Dlusky won on summary judgment at both the federal and state level. This situation is not so uncommon in today’s world. So often, business partners do not prepare for their death or disability. By implementing a carefully crafted buy-sell agreement or provision in the operating agreement (in the case of an LLC), businesses can protect both the business and their families from the harsh result found in the case of Saxe v. Dlusky.

If you have an ownership interest in a business and you do not have a buy-sell agreement with the other owners, call the attorneys at Kohler & Smith Co., LPA. A buy-sell arrangement is a smart idea for you, your business, and your family.