The Business Continuation or Buy-Sell Agreement
Every privately held business with more than one owner needs a business continuation or buy-sell agreement. A buy-sell agreement (“Agreement”) helps ensure the survival of the business and establishes its value upon the future occurrence of certain significant ownership-changing events. These include:
Transfers of Ownership : The Agreement will restrict transfers to outsiders and grant an option to the business or the remaining owners to buy the ownership interest in the event of an attempted transfer.
Death or Permanent Disability : The Agreement will provide for an optional or mandatory buy-out of the deceased or permanently disabled owner's interest and establish the price and terms of the buy-out. Insurance can be put in place to fund the purchase.
Retirement or Other Termination of Employment : The Agreement will provide for an optional or mandatory buy-out of the retired or terminated owner's interest and set forth the purchase price and payment terms of the buy-out.
Bankruptcy and Divorce : The Agreement will contain an option and purchase price for the business or other owners to buy an ownership interest being held by a Trustee in Bankruptcy or awarded by a Court to an owner's ex-spouse.
- Insoluble Business Disputes : In the event of a business stalemate which jeopardizes the future of the business, the Agreement will set forth various mechanisms to resolve the dispute and avoid a costly business dissolution.
A key component of the Agreement is the establishment of an accurate fair market value for the business. This can be done in variety of ways, including the application of a valuation formula, annual agreement among the owners and appraisal.
If your business doesn't have an up to date Buy-Sell Agreement in place, its long-term survival is at great risk.