|
Business Valuation LLC Phone: 304 692 1385 Fax :304 599 7250 Email: bizvaluer@valuellc.com |
|
Active and Passive Appreciation
|
Buy/Sell Agreements A buy-sell agreement is a binding contract -- between the owners -- that controls when an owner can sell an interest, who can buy an owner's interest and how that interest will be valued and paid for. Buy-sell agreements are crucial for family-owned businesses for two reasons. First, a well-drafted buy-sell agreement provides guidelines for valuation of the estate. In particular, choosing the right valuation formula early on can help to minimize estate taxes when a co-owner dies. Such agreements can also serve to keep the peace as serious disputes can and often do arise in family businesses just as they do in families themselves. Second, a buy-sell agreement contains provisions for reminding you and your co-owners during an ownership transition how you agreed to handle a potential sale or buy-back situation. You can design a buy-sell agreement factoring in different scenarios, including whether your clients want to keep their company very small and private, how long they expect this business to last and who is expected to succeed the founding owners. A well-drafted buy-sell agreement gives owners the power to prevent outsiders from buying in, or to purchase an owner's interest after he dies rather than allow his inheritors to become owners. A buy-sell agreement also gives the company and its owners an opportunity to buy out an owner who has stopped working for the company or has died, eliminating the need to share control and profits with an inactive owner or an unsuitable new owner. In the absence of such an agreement, you may be stuck co-owning the company with a bankruptcy trustee or creditor if a co-owner is forced to file for personal bankruptcy or defaults on a personal loan secured by his ownership interest. This can create business delays and prevent you from getting bank loans. A typical buy-sell agreement gives the company and the owners the right to buy out an owner when: * an owner retires, or becomes disabled and is no longer able to contribute to the company's operations. * an owner divorces and the ex-spouse receives an ownership interest in the company as part of the divorce settlement. * an owner's interest is in danger of being confiscated by creditors (because of a personal bankruptcy or foreclosure of a debt). * an owner dies, and his estate representative or inheritors want to sell his interest back to the company or the continuing owners. If your clients are forming a new company, are contributing a lot of cash or property, are in their 50s or 60s, and you think their circumstances warrant a sophisticated and complex agreement, you may want to develop a well documented buy-sell agreement. Business Valuation LLC can help to develop valuation models and illustrate the impact of different funding strategies on the buy-sell plans you develop for your clients. contact us. |