A Buy-Sell agreement is an essential part of a multi-owner business that ensures continuation of the business when an owner leaves the business. Sometimes it is planned, sometimes not, however many of these agreements, once written, are put into a drawer until needed. Most certainly, circumstances change and evolve over time, and you find yourself surprised by provisions that were put in several years ago.
Typically drafted by an attorney, with tax and estate planning input from a CPA, a buy-sell agreement is a legal contract detailing how and when an owner can sell his or her interest in the business. Also known as a shareholder agreement, this document outlines how the business interest will be valued and to whom the interest may be transferred or sold.
Buy-sell agreements typically cover a number of important areas which should be included in your review, such as:
Triggering events: Renew your understanding of the events defined in the agreement that start a buy out or redemption necessary. Make sure you and partners still agree on them and make sure you believe they are complete.
Buyout method: Most buy-sell agreements include either a cross-purchase agreement or a redemption agreement. Reevaluate the reasonableness and practicality of your current buyout method. Understand the sources and uses of each method. The goal is to ensure the company can remain viable after a buyout.
Non-compete requirements: Review the time frames and applicability of these provisions. Consider what may be traditional in your industry as a starting point in this discussion and adoption.
Valuation: Is the valuation method or determination reasonable? Often there are formulas and processes that are required. This is an area that can become out-dated if not reviewed periodically.
Reviewing your company buy-sell agreement with your partners before a stressful event occurs helps ensure that calm conversation will prevail and nothing will be left to chance. The issues and concerns addressed by a buy-sell agreement that is created today won’t necessarily be relevant in the future — and if the agreement is out of date, it’s not useful.
Is it time to rewrite or revise your buy-sell agreement? We’ll be happy to weigh in on the financial matters involved. Contact John Lawson for more information.