The Buy-Sell Agreement: Position Your Business For Continued Success
June 6, 2013
The buy-sell agreement is an important part of business ownership. When properly executed, it allows for smooth ownership transitions—and continued success—of family-owned and closely held businesses. Most important, it ensures fairness is not an issue and keeps emotions out of play.
A buy-sell agreement outlines the roles and rights of all parties involved in the business. At its most basic level, it prevents an owner from selling their business shares to an outsider without the consent of the partners. It may help to determine the value of each co-owner’s interest in the business, while helping to limit liability and resolve tax and business issues.
Many of our clients—and especially the professional services firms I work with—are multiple-owner businesses. In many cases, their businesses will be transitioned to new owner(s) because of retirement, the sale of the business, or death of the owner(s). Each of these events is likely to be stressful on its own, which is why it’s important to think about your buy-sell agreement now—instead of when you need it.
When drafting or revising a buy-sell agreement, consider these key areas:
- The roles and rights of all parties involved in the event of retirement, the sale of the business, or death of the owner(s).
- The methodology used to value of each co-owner’s interest in the business. (Generally, we do not recommend a formula; we recommend an independent valuation.)
- The funding mechanism and terms for the purchase of the business interest.
- The transition plan of exiting owners, including an employment agreement, if applicable.
- A non-compete agreement, as needed.
Your accounting professional can refer trusted attorneys and other professionals who can help draft and implement your buy-sell agreement.
Now, rather than when you need it, is a good time to draft a buy-sell agreement or review your existing one. In either case, be sure to consider the key areas listed above. A buy-sell agreement that covers all the bases can go a long way toward preventing stressful situations—and sustaining the success of your business.
Meet the Expert
Doug McDonald, CPA
Doug helps develop solutions for challenges ranging from choosing the right entity type to increasing business value.