A buy-sell agreement is an agreement between partners or co-owners of a business that governs the situation if a partner or co-owner dies or is otherwise forced to leave the business or voluntarily chooses to quit.
Buy-sells are a business form of a premarital agreement between business partners/shareholders or are sometimes called a “business will”. An insured buy-sell agreement (triggered buyout is funded with life insurance on the participating owners’ lives) is often recommended by business-succession specialists, CPA’s and financial planners to ensure that the buy–sell arrangement is well-funded and to guarantee that there will be money when the buy–sell event is triggered.
A buy–sell agreement consists of several legally binding clauses in a business operating agreement or a separate, freestanding agreement and controls the following business decisions:
• Who can buy a departing partner’s or shareholder’s share of the business (this may include outsiders or be limited to other partners/shareholders);
• What events will trigger a buyout (the most common events that trigger a buyout are: death, disability, retirement, or an owner leaving the company) and;
• What price will be paid for a partner’s or shareholder’s interest in the partnership?
• Buy-sell agreements can be in the form of a cross-purchase plan or a repurchase (entity or stock-redemption) plan. For greater neutrality and effectiveness of the buy-sell arrangement, the service of a corporate trustee is recommended.
The valuation professionals at Valley Valuations can assist in drafting appropriate buy-sell agreements. With a strong background in accounting and taxation, our professionals can customize an arrangement that works for all the parties involved in the agreements. Too often, boilerplate buy-sell agreements lead to unintended results, and many are surprised by the outcome, often leading to unfair economic treatment to a particular side. This stems from a lack of creativity and upfront planning in considering the desired results that lead to a fair outcome. Having the valuation methods and processes properly considered when drafting the buy-sell agreement is paramount.