Equitable Distribution

Divorce and the Family Business – Triggering Event in Buy-Sell Agreements

Based on multiple studies and statistics, the sad truth is that divorce is virtually inevitable in any sizable family. Divorce can be a severe disruption to a family business, so as much advanced planning as possible should be done to minimize or, better yet, to avoid such disruptions.

Buy-sell agreements should, but rarely do, cover divorce as a triggering event. The date of formal entry of the decree of dissolution of an owner’s marriage can be the “official” event which triggers the right of the other owners or the business entity to acquire the business interest of a new owner who acquired that interest as the result of dissolution. The buy-sell agreement can provide the payment schedule for the interest being acquired and can provide that the subject shares, interests, or units would be redeemed automatically upon dissolution or be callable at the option of the other owners or the business.

Courts handling dissolution proceedings vary in their treatment of buy-sell valuation clauses. If the buy-sell agreement is among unrelated parties, was entered into well before the divorce appeared on the horizon, and the purchase price is commercially reasonable, the purchase price set by the buy-sell agreement may be considered to be the fair value of the business interest. The purchase price set by the buy-sell agreement may not be recognized as the fair value of the business interest for dissolution of marriage purposes if the buy-sell agreement was entered into in contemplation of the dissolution, it is among related parties, and the purchase price is unreasonably low.

Reference: Turney P. Berry, Philadelphia Estate Planning Council, Business Succession Planning, January 9, 2018

Kindly visit our Business Succession Planning and Family Law websites or contact one of our Business Succession Attorneys, Philadelphia or Family Law Attorneys, Philadelphia at 215-977-8200 for more information on this topic.