Business Buy-Sell Agreements
If you
own a business and have a partner (or co-owner) then the chances are that
you should also have a buy-sell agreement in place. The following is
a summary of what a buy-sell agreement is and how it can help you and the
other owners of your business.
A
buy-sell agreement is a contract that you and the other owners of your
business can agree to in advance of when it is actually needed that will
specify under what terms an ownership interest in the business will be sold
or transferred. The agreement can be a section of a partnership
agreement or it can be a stand-alone document.
The principal
items covered in a buy-sell agreement include how the sales price for the
interest will be determined, how it will be paid for and at what terms
(rate of interest and length of time). The agreement will also state
who has the first right to buy the retiring ownership interest. For
instance, the agreement could require that the business itself must be
offered the ownership interest, or it could require that the remaining
shareholders be offered the ownership interest.
The
agreement can also do more than the basics. If you are doing business
as an "S" corporation, the agreement can specify that the buyer
of the interest will agree to continue the corporation's special tax status
before the buyer is allowed to transfer the ownership interest. The
point here is that with proper professional assistance, a buy-sell
agreement can be a very flexible and valuable tool for you in the transfer
of an ownership interest in a small business.
Who will Buy the
Interest
The buy-sell agreement can specify that the business itself must buy back
the ownership interest or the agreement can require the remaining owners to
make the buy-back. The agreement can allow either the corporation or
the remaining owners the first right to buy back the interest the the other party the right to do so if the first one
says no to the deal.
Since
selling a partial interest in a small business is a difficult thing to do
sometimes, the existence of a buy-sell agreement will greatly facilitate the
transaction.
How to Value for
the Interest
The agreement should provide information on how the owners want to value
any ownership interest that will be sold under the agreement. A
statement that the interest will be sold at fair market value is a start,
but it doesn't really tell anyone how that amount will be computed.
If you agree that a business valuation should be done to ensure a fair
market value is employed in the price, then the
agreement can require a valuation be completed within certain time
guidelines. If the owners would rather agree on a benchmark such as
"twice gross sales plus inventory" as the formula to arrive at
the fair market value, then, as long as that formula has some reasonable
basis, it could be used.
If estate
planning issues are important, and usually they are, then it is important
to have the buy-sell agreement put the transfer value at fair market value
and that the majority shareholder does not have any more choices in the
transfer than the minority owners. Please see your tax professional
on this issue as it is a very complicated area.
