Buy Sell Agreement
Buy sell agreements are commonly utilized to
protect company ownership. Here are some buy
sell agreement basics.
Despite what the name indicates, a buy sell agreement isn’t an agreement to buy and sell anything.
Rather, it’s an agreement made by business co-owners to sell their interest in the business in certain
circumstances. The buy sell agreement protects the remaining owner’s interest in the business if one
owner gets divorced, becomes disabled, leaves the company, retires, or files bankruptcy, for example.
The buy sell agreement spells out the specific situations that a co-owner can, cannot, and must sell their
interest.

Why A Business Would Have a Buy Sell Agreement

A buy-sell agreement can exist for any type of business: partnership, proprietorship, or corporation.
Many people may think they can operate the business without a hitch, but you never know what could go
wrong.

For example, what if your business partner divorces his spouse and the ex-spouse now claims to have
financial stake in the company? The buy-sell agreement would spell out what happens in this situation.
What if a partner decided they no longer wanted to be in business, but would sell their interest to a friend
that none of the other partners has met? A buy-sell agreement would determine whether this can be
done and explain the process for doing it.  Buy-sell agreements can also prevent the bankruptcy court
from liquidating the business if one of the owners files personal bankruptcy.

How to Valuate the Company

Before the two owners can come up with a price for
buying/selling the departing owner’s business interest,
the company needs to be appraised by a financial
professional. That person would look at the business
financials and decide how much the company is worth.
Then, that number would be used to come up with a
buy/sell price.

Because there can be some disparity in company’s
valuation when it’s time for an owner to sell his interest,
the buy sell agreement should have some type of
arrangement for valuating the company when the time
comes. Otherwise, the co-owners could use different
financial professionals who come up with different
valuations. The result is a disagreement on how much the remaining co-owner should pay for the
departing owner’s interest. Agreeing to a valuation method beforehand reduces the risk of problems
later on.

Various Terms of the Agreement

The buy-sell agreement could also set a fixed purchase price or a formula for determining price for a
buyout. The agreement might state different buyout prices or formulas for different triggering events.

The buy-sell agreement should include details about how the buy-out payment should be structured. It
can specify that the departing owner’s interest be purchased either by the remaining owner(s) or by the
business itself. It might be unreasonable to expect the remaining owner to pay 100% of the buy out price
all at one time. Instead, the agreement might call for a lump sum payment followed by periodic payments
for a certain period of time.

Buy sell agreements might require business owners to have life and
disability insurance with the
business named as the
beneficiary. The benefit amount on the insurance would be a specific amount
that’s agreed upon in the buy sell agreement.  While life insurance proceeds are typically exempt from
income taxation, depending on the type of business, life insurance proceeds could make the business
subject to additional tax.

A business or tax attorney can help you prepare a buy-sell agreement. While it’s best to have the
agreement in place before the business starts, it’s never too late to put one in place. It can keep you
from having to go to court to resolve disputes and, more importantly, can keep your business in tact if
something happens to one of the business owners or one owner decides to leave the business.
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Buy Sell Agreement