What Type of Agreement is Used to Allow a Child to Purchase a Family Business in the Future?
The answer will depend on whether you intend to give her a present stake in the business to be paid off over ten years, or a right to purchase ten years from now, and the type of entity involved. In the first instance a promissory note could be used. Corporate bylaws or applicable operating agreement, etc. will govern the method of sale.
A LLC typically has an operating agreement that governs the procedures for a sale of an interest in the business. It may be necessary to amend the articles of organization/certificate of formation, a buy-sell agreement is often recommended, and there may be notices of meetings, resolutions, DBA filings, promissory notes or other documents required. The operating agreement governs the requirements and processes for your particular LLC when it comes to termination of a membership in the LLC or sale. Typically, a vote of the members will be required to terminate a membership and so a certain percentage of the current LLC members must approve. All termination or buyout requirements set forth in the LLC operating agreement or buy-sell agreement should be met. In some cases, it may be helpful to have an attorney review all the facts and documents involved to ensure all requirements are complied with.
The sale of a business interest, such as in a LLC can be accomplished through a buy-sell agreement. A buy-sell agreement is an agreement between members of a LLC, partners of a partnership or between a shareholder and a corporation whereby the parties agree to the terms and conditions of a future sale of the partners or shareholder's interest. By signing the agreement, the party contractually limits his or her ability to dispose of his or her interest in the partnership or corporation to the terms of the agreement.
While the most common buy sell agreement forms are written for partnerships and corporations, they can be easily modified to suit the sale of a LLC.
A promissory note may be secured or unsecured. When it is secured, it means that property, called collateral, may be taken by the lender if the borrower fails to pay the loan payment. If the debtor files bankruptcy, the lender may be able to recover the value of the loan by taking possession of the specified collateral instead of receiving only a portion of the borrower's property after it is divided among all creditors. Collateral may be many different types of property, such as personal property, shares of stock of a company, inventory, accounts receivable, etc.
The parties to the loan must sign it and the notary must witness the signatures. The contract may contain a choice of law clause as to where it will be litigated if a dispute arises. Choice of law refers to what jurisdiction's law is to be applied when there is a dispute in a transaction. The loan document may then be recorded in the county recorder's office where the property is located.
A promissory note may provide for payments to be made in installments or in a lump sum. The terms may provide for a series of smaller payments at the beginning of the loan period and a larger balloon payment at the end of the loan period. The option for a confessed judgment agreement, also called a cognovit note, may also be included. A confessed judgment agreement requires the debtor not to claim defenses and agree to have a judgment entered against him if he fails to pay and the matter is taken to court.
Promissory Note: A promissory note is a written promise to pay a debt and is typically signed at the time of the loan. It is an unconditional promise to pay on demand or at a fixed or determined future time a particular sum of money to or to the order of a specified person or to the bearer.
Cognovit Note: A cognovit note is a note in which the maker acknowledges the debt and authorizes the entry of judgment against him or her without notice or a hearing : a note containing a confession of judgment. This type of note is not valid in many States.
Collateral Note: A collateral note is a note secured by collateral. Same as a secured note.
Demand Note: A demand note is a note payable on demand from the person who is owed the money.
Floating Note: A floating rate note (or adjustable rate note) is a note where interest varies.
Recourse Note: A recourse note is a note where the default may result in loss of collateral and also personal suit and judgment. Most notes are recourse notes.
Renewal Note: A renewal note is a note that renews a previous note due date.
Unsecured Note: An unsecured note is a note that is not secured by any collateral but only the promise to pay (i.e. signature only is required to loan the money).
A right of first refusal may take place in a multiple-buyer, sequential bargaining
setting. The holder of a right of first refusal has the option to purchase a subject asset on the same terms as those accepted by a third-party buyer. A variant of a right of first refusal is a right of first offer. A right of first offer requires a seller who wishes to sell a subject asset to offer the right-holder to buy that asset before it is offered to other potential buyers. If the right-holder declined the seller’s offer, the seller may sell the asset to a third party but only on terms no better (for thethird party) than those offered to the right-holder.
A seller encumbered with a right of first offer is subject to two constraints. First, a right of first offer requires that offers made subsequent to the first offer may not be lower than the first offer. Second, all offers may not be higher than the value of potential buyers’ investigation constraint.