Business Buy/Sell Agreements

It is important that businesses with more than one owner have a written buy/sell agreement specifying what happens when an owner withdraws from the business. A buy/sell agreement is a contract between the owners (or the owners and the business entity itself) that establishes rules and restrictions applicable to changes in ownership.

The typical buy/sell agreement provides that an owner’s interest in the business will be sold (or at least offered for sale) at a specified price to the other owners and/or to the business entity itself upon the occurrence of specified events. This prevents unwanted persons from becoming members of the ownership group and ensures a ready market for closely held ownership interests. It also provides liquidity to a deceased owner’s family and assures the remaining owners that they will be able to continue the business without interference from the family of the deceased owner. Buy/sell agreements also offer estate planning benefits by establishing a value for the business prior to an owner’s death.

Common methods for determining the purchase price under a buy/sell agreement include: establishing a fixed price in the contract; requiring an independent appraisal; or specifying a formula such as a percentage of book value. Events that trigger a buy/sell agreement are specified by the owners in the contract. Generally, buy/sell agreements are triggered by any circumstance that might cause an owner to dispose of an ownership interest such as death, disability, bankruptcy, or retirement.

The best time to establish a buy/sell agreement is now, before a problem develops. If you do not have a buy/sell agreement for your business, we would be happy to discuss their merits with you. Your attorney should be consulted in formulating the terms of a buy/sell agreement, or prior to changing an existing agreement.

Please call us at your convenience if you would like to discuss buy/sell agreements or any tax compliance or planning matter.