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
Partner
Spectrum Management Group
Indianapolis

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.

Rob

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.
www.buy-sellagreements.com 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.

Post a comment

 

About

Want to improve the way you run your business? Entrepreneurs, academics, and consultants from diverse industries offer practical advice on a variety of topics each business day.

To submit a tip for consideration, first check our archive of previous tips to make sure you're not repeating a tip someone has already contributed. Then send the tip to Small Business channel contributor Michelle Dammon Loyalka. Because of the volume of material she receives, she may not respond to each individual.

BW Mall - Sponsored Links

Buy a link now!