Buy -Sell Arrangements
A buy-sell agreement is a legally binding understanding between co-owners of a business that, under agreed upon circumstances, allows one or more owners to buy-out another owner. Buy-sell agreements are most frequently used in the case of a management deadlock, or in the event of the death, retirement, or resignation of an owner. A well drafted and up-to-date buy-sell agreement that reflects the expectations of the owners is imperative to avoid costly, drawn out litigation and ensure the long-term viability of the business.
There are many moving pieces that need to be evaluated in a buy-sell agreement, but they can be categorized as either being a trigger, valuation impact or funding vehicle. By far and away the most common situation in the marketplace today is for the owners to put in a buy-sell agreement shortly after forming the business and then never looking at it or updating it again. The reason for this is the owners don’t truly grasp the potential impact of this agreement on their business.
The buy-sell agreement doesn’t just govern what happens to the owner’s interest at death. It can also determine the impact to a partner upon his/her retirement, liquidation, divorce and other events that may change their current ownership structure. This agreement also should specify the price, formula or methodology governing the valuation.
Our recommendation is for business owners to review their buy-sell agreements at least once every three years because, let’s face it… things change. Whether the business has changed, your circumstances have changed, your partners have changed or the tax law has changed, it makes sense to evaluate the document that is most likely going to govern how your most significant asset is handled during the most meaningful events of your life.