My name is Richard Keyt. I am an Arizona business lawyer who has practiced law in Arizona since 1980 and who has formed thousands of companies. I have seen far too many situations where owners of a company suffered dearly because they failed to adopt a Buy Sell Agreement. When people join together (other than a husband and wife) to go into business they do not realize that business divorces are more common than husband and wife divorces (50%+). A U.S. Bureau of Labor Statistics study found that 66% of new businesses did not last four years. A special tabulation by the Bureau of the Census produced for the Office of Advocacy of the U.S. Small Business Administration found that 71% of start up businesses failed within ten years.
Companies fail for many reasons, but a common reason for failure is one owner or one group of owners cannot get along with another owner or another group of owners. When this happens I say the owners need a “company divorce.” Unfortunately for most people who need a company divorce there is no easy way to consummate the divorce because the owners never signed a Buy Sell Agreement. Arizona law does not provide for a company divorce other than an involuntary judicial dissolution. When the owners of an Arizona company cannot agree on how to divorce and they do not have a Buy Sell Agreement, they only have two options: (1) continue on indefinitely, or (2) one owner can file a lawsuit in Arizona Superior Court and ask the court to dissolve the company.
The involuntary judicial dissolution is always an expensive nightmare for all concerned. Each side has to burn money (i.e. attorneys’ fees) while waiting for the court to decide how to divide the pie and kill the company. Judicial dissolution should be the last resort because it ultimately ends with the termination of the company unless the parties tire of burning money and agree to a settlement.
The Buy Sell Agreement is the Exit Strategy
Without exception I always recommend that when people go into business together the first thing they should do after forming their new company is adopt a Buy Sell Agreement because it contains the owners’ exit strategy. A good Buy Sell Agreement provides for how the owners will deal with and buy out the interests of one or more owners when they cannot agree or on the happening of a triggering event such as death or termination of employment. The purpose of the Buy Sell Agreement is to make a company divorce less expensive and painful for all owners.
For more about the importance of the Buy Sell Agreement see my article called “A Multi-Member LLC’s Most Important Document.”
Why Every Arizona Medical Marijuana Dispensary Must Have a Buy Sell Agreement
The Buy Sell Agreement is a must have document for every Arizona medical marijuana dispensary company because if ANY PRINCIPAL OFFICER OR BOARD MEMBER OF THE COMPANY CEASES TO MEET ANY ONE OF THE REQUIREMENTS CONTAINED IN THE ARIZONA DEPARTMENT OF HEALTH SERVICES’ RULES THE COMPANY WILL BE PREVENTED FROM APPLYING FOR A DISPENSARY LICENSE OR IF IT HAS A LICENSE THE ADHS WILL REVOKE THE COMPANY’S DISPENSARY LICENSE. Consider this example:
Example 1: World Wide Widgets, LLC, an Arizona nonprofit LLC, has three members, Homer Simpson, Ned Flanders and Chief Wiggins. They invest a ton of money, time and effort to obtain a license to operate an Arizona medical marijuana dispensary. Two years after the LLC opened its doors for business, Ned Flanders is convicted of an excluded felony. The Arizona Department of Health Services will revoke the company’s dispensary license.
The Arizona Department of Health Services medical marijuana dispensary rules contain grounds to revoke or deny an original and a renewal dispensary license if any principal officer or board member of the company violates any of the prohibitions contained in the rules. Here are the conditions that principal officer or board members must satisfy at all times:
- R-17-322.A.2: “The Department shall deny an application for a dispensary registration certificate or a renewal if: . . . A principal officer or board member . . .
b. Has been convicted of an excluded felony offense.
c. Has served as a principal officer or board member for a dispensary that:
i. Had the dispensary registration certificate revoked, or
ii. Did not obtain an approval to operate the dispensary within the first year after the dispensary registration certificate was issued.
e. Is a physician currently providing written certifications for medical marijuana for qualifying patients;
f. Is a law enforcement officer; or
g. Is an employee or contractor of the Department”
- R-17-322.B states: “The Department may deny an application for a dispensary registration certificate if a principal officer or board member of the dispensary provides false or misleading information to the Department.”
- R-17-322.C.2 states: “The Department shall revoke a dispensary’s registration certificate if . . . . A principal officer or board member has been convicted of an excluded felony offense.”
If any principal officer or board member is convicted of an excluded felony the conviction will prevent the company from obtaining OR RENEWING a dispensary license. If the company has a dispensary license, ADHS will revoke its license.
The term “excluded felony” is defined in Arizona Revised Statutes Section 36-2801.7 , which states:
“Excluded felony offense” means:
(a) A violent crime as defined in section 13-901.03, subsection B, that was classified as a felony in the jurisdiction where the person was convicted.
(b) A violation of a state or federal controlled substance law that was classified as a felony in the jurisdiction where the person was convicted but does not include:
(i) An offense for which the sentence, including any term of probation, incarceration or supervised release, was completed ten or more years earlier.
(ii) An offense involving conduct that would be immune from arrest, prosecution or penalty under section 36-2811 except that the conduct occurred before the effective date of this chapter or was prosecuted by an authority other than the state of Arizona.
How a Good Buy Sell Agreement Can Solve the Ineligible Owner Problem
My Buy Sell Agreement for a company that intends to acquire and operate an Arizona medical marijuana dispensary solves the owner ineligibility problem because it provides that if an owner ever ceases to meet all the ADHS eligibility requirements, then at that moment in time the company purchases the ownership interest of that owner for an amount calculated by the method selected by the owners and set forth in the Buy Sell Agreement. The end result is that an ineligible owner is never a problem that would prevent the company from obtaining or renewing its dispensary license. My Buy Sell Agreement also provides that if any eligibility requirement ceases to be an ADHS requirement to renew the dispensary license, that requirement will no longer trigger a buy out.
Example 2: Same facts as in Example 1 except all the members of World Wide Widgets, LLC, signed my Buy Sell Agreement. Effective simultaneously with Ned’s conviction of an excluded felony his membership interest in the company was purchased by the company and Ned ceased to be a member. The Buy Sell Agreement contains a valuation method that determines the purchase price and it provides for the terms of the payment of the purchase price according to what the members agreed to. For example the value of the company might be determined by an appraisal method with the purchase price to be paid with a 20% down payment within thirty days of the date of Ned’s felony conviction and equal payments of principal and interest at four percent over 5 years.
Because I believe this is such an important issue, every one of the nonprofit LLCs that I form must have my Buy Sell Agreement.
If you need a Buy Sell Agreement for a prospective Arizona medical marijuana dispensary, call me, Richard Keyt, at 602-906-4953, ext. 1.
If the dispensary is set up as a non-profit, there are no owners. What is the problem/solution in the case for non-profit status.
Also, regarding dispensaries, can a non-profit corporation later change its status to an LLC?