A vital business document: the buy/sell agreement

Every business should give serious consideration to how the company would deal with the death, disability, or departure of one of the owners.

Like a will, a buy/sell agreement (also known as a business continuity contract) spells out how assets and other business interests will be distributed should an owner quit, become disabled, or die.

Without such an agreement, complications arising from ownership succession may capsize an otherwise thriving company. The remaining owners might be forced to share management and profits with unskilled or contentious outsiders. They may be embroiled in legal disputes over business assets and liabilities. A firm’s internal squabbles may spill over to customer service, resulting in lost sales. If the firm’s ownership seems doubtful or its future uncertain, creditors might accelerate collection efforts, bringing unwanted pressure on company resources.

The possible death of an owner isn’t the only reason to prepare a buy/sell agreement. Sometimes an owner voluntarily decides to leave a company. He or she may want to pursue another business opportunity, a change of climate, a different professional relationship, or a well-earned retirement. By providing a mechanism for assessing a firm’s value and ensuring that all parties are treated equitably, a carefully crafted buy/sell agreement will facilitate that kind of transition as well.

At a minimum, a buy/sell agreement should cover the following:

* Triggering events. What happens if an owner dies, becomes disabled, or leaves the company? What happens if he or she files for divorce or is caught skimming profits? The buy/sell agreement should spell out the company’s response to such events, including how assets will be transferred, stock ownership controlled, and voting rights secured by the remaining owners.

* Valuation. The agreement should lay out how the business will be valued should a triggering event occur. For example, it might include a specific price for an owner’s interest or specify a formula for determining the company’s value. It might even name a specific firm to conduct the valuation. If the triggering event is the death of an owner, the buy/sell agreement might also guarantee a specific lump sum to be paid to the deceased owner’s estate.

* Buyout method. If one owner leaves the firm, becomes disabled, or dies, the buy/sell agreement should contain provisions specifying how remaining owners will buy out the interest of that partner. (In many cases, owners use life or disability insurance proceeds to fund a buyout.)

To ensure that the buy/sell agreement remains relevant and up to date, owners should review it periodically and revise it as needed. If you need help preparing or reviewing a buy/sell agreement for your company, contact us and your attorney.

About Brenda J. McGivern, CPA

Brenda McGivern started her own certified public accounting and management consulting firm in October 2001. The full service CPA firm provides tax and accounting solutions to meet the needs of today's small business and individual. Brenda McGivern has become a trusted advisor and valuable resource her clients rely on for timely, accurate assistance when they need it. Before starting the firm, she worked as an accountant for three years at a local firm and prior to that five years at a large international CPA firm in Boston. She has performed the following tax services: federal, state and local tax planning, international tax planning, estate and succession planning, mergers and acquisitions, capital retention and IRS representation. She has also coordinated assurance engagements, such as financial statement audits, reviews and compilations from the planning phase through the reporting phase. She has prepared and reviewed regulatory filings for numerous regulatory agencies including the Security and Exchange Commission. Prior to these positions she was selected from over 2,000 candidates into an eight-person intensive financial management program at an international technology company. The program consisted of graduate level classroom study and two six-month rotational assignments in financial operations. She graduated cum laude from the University of Massachusetts at Amherst and holds a Bachelors Degree in Business Administration with a concentration in accounting. McGivern also holds a license in Massachusetts as a Certified Public Accountant and is a member of the American Society of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She resides in Stoughton, Massachusetts with her husband Brian, and their sons Sean, Ryan and Conor and their dog, Davis.
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