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Essentials in a Buy-Sell Agreement

Posted by: Today's Tip Contributor on February 12, 2010

Buy-sell agreements are one of the most important and yet often overlooked documents a closely-held business can have in place. This agreement establishes how the business will continue and ownership transferred upon a triggering event such as death, disability, retirement, divorce, or bankruptcy of one of the business owners.

A properly drafted buy-sell agreement can achieve all of these goals by:
1. Providing that upon the occurrence of a specified "triggering event," owners are assured that their interest in the business will be purchased;
2. Providing that the owner’s interest must be sold to the company, the remaining owners, or a combination of the two;
3. Providing a mechanism whereby the purchase price either is determined by an established formula or may be determined by market conditions in existence upon the occurrence of the event;
4. Identifying a source of funding, such as insurance policies, so that the liquidity needs of the business or its owners will be manageable.

A buy-sell agreement is especially useful in estate planning, as it provides the ability to fix the purchase price and therefore the taxable value of a business interest. Agreeing to a purchase price can minimize the possibility of unfair treatment to heirs.

Leslie Thompson
Spectrum Management Group

Reader Comments

Chris Mercer

February 13, 2010 2:03 PM

Buy-sell agreements are, indeed, important for closely held businesses. Too often, however, the valuation mechanism is overlooked in the drafting process -- or by the parties after an agreement is signed. In other words, many buy-sell agreements simply won't do what the parties expect.

My blog, www.buysellagreementsonline, provides a recurring source of information for business owners and their advisers regarding this most important agreement for many companies.


February 16, 2010 10:59 PM

Well written article. I believe most any financial professional would agree that this is the one document that every business owned by 2 or more owners needs to have. is another good resource for learning about and downloading a sample buy-sell agreement.

Prof P.Madhu Sudana Rao,Ethiopia

February 28, 2010 12:39 AM

It is an important document,which has to be carefully,drafted, and read by both the parties.It needs an expert advice in wording it.Both buyer and seller have to retain a copy of it.It must be mutually acceptable and signed by both in the presence of a reliable witness.
The agreement has more value,if it is a speculative commodity,whose prices fluctuate.The problem is more complex,if the commodity is delivered on credit basis,than cash basis.There should be a standard proforma, and more contents can be added,without violating moral and ethical values.The documented is to be preserved carefully,till the execution of the contract, and money received.

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