Small businesses and specifically family businesses are the backbone of the American economy, offering
opportunities to build wealth and legacy across generations. However, when a business lacks clear legal
structures, specifically a buy-sell agreement, they are vulnerable to family strife, shareholder disputes,
and pushouts that can tear the business and family relationships apart.
Without a proper agreement in place, even the closest-knit families may find themselves embroiled in
disputes, as personal and financial interests become intertwined.

The Risks of Not Having a Buy-Sell Agreement

A Buy Sell Agreement or Shareholder Agreement is a legally binding contract that outlines how a
partner’s share in the business can be sold or transferred in the event of certain triggering events, such as
retirement, death, divorce, or incapacitation. When family businesses fail to establish this agreement, they
risk:
1. Family Infighting and Strife: Without clear guidelines for how ownership interests will be managed,
family members may begin to disagree over the business’s future direction. Sibling rivalries or disputes
over inheritance can lead to a breakdown in trust and communication.

2. Push Outs: When a family business lacks a formal agreement, stronger or more involved family
members may push others out of the business or limit their decision-making power. This often happens
when one family member controls a majority share and leaves others feeling disenfranchised, leading to
long-lasting resentment.

3. Valuation Disputes: When it’s unclear how a departing family member’s ownership share should be
valued, disputes over the fair market value of the business can arise. Without pre-determined valuation
methods in a buy-sell agreement, disagreements can escalate into litigation.

4. Unwanted New Owners: If a family member passes away or divorces, their ownership stake might
transfer to a spouse or children outside the business. This can introduce non-family members into the
business, potentially creating friction among existing family owners.

Potential Legal Solutions to Family Business Disputes
While prevention is always preferable, family businesses that lack a buy-sell agreement or are already
facing internal disputes have several legal options to resolve conflicts:

1. Filing for Dissolution: In extreme cases where the family business can no longer function due to
conflicts, one option is to file for dissolution. Dissolution ends the business’s existence, and its assets are

distributed among shareholders. California law allows for involuntary dissolution if the shareholders or
directors are so divided that the business can no longer be conducted.

2. Derivative Claims: Shareholders who believe that the business’s leadership is acting inappropriately,
or mismanaging company assets can file a shareholder derivative lawsuit. This legal action allows a
minority shareholder to sue on behalf of the company if the majority owners or directors are breaching
fiduciary duties, such as self-dealing or misappropriating assets.
3. Appointment of a Receiver: When a family business is in financial or operational distress, the court
can appoint a receiver to manage the business temporarily. A receiver is an impartial third party who steps
in to preserve the company’s assets and may be tasked with liquidating the business or finding ways to
resolve disputes among shareholders. This solution can stabilize the business while the family works
toward a long-term resolution.

Proactive Measures: Buy-Sell Agreements and Succession Planning

The best way to avoid family business disputes is to put clear, enforceable agreements in place long
before conflicts arise. Here are a few key steps to take:

1. Work with Counsel to Draft a Buy-Sell Agreement. This document will govern how ownership
interests can be transferred and under what conditions. It should cover triggering events like retirement,
disability, death, and divorce, and outline how the business will be valued in such situations.

2. Succession Planning: Ensure that there is a clear succession plan in place for leadership transitions.
Whether the business will be passed to the next generation or sold, having a plan ensures continuity and
avoids power struggles.

3. Regular Review of Agreements: Family businesses evolve over time, and the buy-sell agreement
should be reviewed and updated regularly to reflect changes in the family, business, and legal landscape.
Moreover, they should be reviewed, and valuations should be updated by valuation specialists.

Garcia and Gurney corporate attorneys meet with clients once a year to review all legal documents and to
draft necessary documents. This helps our clients safeguard the Company and its employees for future
generations.