‘align your buy-sell agreement with your business’s long-term vision

and strategic objectives. It’s not just about protecting what you have;

it’s about building towards what’s next.’

BUY-SELL AGREEMENT

The primary purpose of a buy-sell agreement is to provide a clear plan and process for the transfer of business ownership interests in the event of specific triggering events, such as the death, disability, retirement, or voluntary sale of a business owner’s shares or interest. One of the most important aspects of a buy-sell agreement is the valuation of the business. Without knowing the value of the business there is no reasonable or competent way to determine the value of one’s shares or financial interest in the business.

By having a buy-sell agreement in place, the business owners create a structured and agreed-upon process for handling these types of situations, avoiding potential conflicts and ensuring a smoother transition of ownership. It provides a level of predictability and security for all of the business partners. Because this agreement is forever changing, it should be outside of the original business partnership agreement.

The predetermined value of the business provides clarity and avoids potential conflicts or disagreements regarding how much the business is worth. The buy/sell agreement ensures that all partners are on the same page regarding the valuation and purchase price in the event of a triggering event, such as death, retirement, or licensure issues.

The triggering events could include circumstances like death, disability, retirement, voluntary sales, or other predetermined events that would require a transfer of ownership. For example:

Death: If one of the partners or shareholders passes away, the buy-sell agreement may stipulate that the remaining partners will “buy out” the deceased partner’s shares or interest.

Disability: In the event of a permanent disability that prevents one of the owners from participating in the business, the buy-sell agreement might dictate a mechanism for the other partners to purchase the disabled owner’s interest.

Retirement: If an owner decides to retire, the buy-sell agreement could outline the terms for the other owners to acquire the retiring owner’s shares.

Voluntary Sale: If an owner wishes to leave the business for personal reasons, the buy-sell agreement might specify how the remaining partners can buy the departing owner’s interest.

If the terms of the buy-sell agreement are not upheld, or if there is a breach in the covenant of the partnership, it may lead to disputes or situations where external buyers or sellers become involved in the transfer of ownership interests. In such cases, the buy-sell agreement serves as a guiding document for resolving the matter and determining the appropriate course of action.

For clarity, make sure the revised agreement explicitly identifies the specific triggering events and the agreed-upon process for handling the transfer of ownership among the partners. The purpose of the agreement remains the same:

to provide a clear plan and process for the transfer of ownership interests,

protect the interests of the business and its partners, and

ensure the smooth continuity of the business in times of transition.

When a business owner’s beneficiaries sell the business shares, several IRS tax forms may be required depending on the specific circumstances of the transaction. Please note that the specific tax forms required can vary based on factors such as the type of business entity, the nature of the sale, the amount of gain or loss, and the individual circumstances of the beneficiaries. It is recommended to consult with a qualified tax professional or an attorney who specializes in tax matters to ensure compliance with all applicable tax laws and requirements.

Key components of a buy-sell agreement:

Parties involved: The agreement typically involves two or more parties, often the business owners or shareholders of a company. These parties are sometimes referred to as “seller” and “buyer,” although the agreement doesn’t necessarily mean an external buyer; it could involve the transfer of ownership within existing owners.

Triggering events: The buy-sell agreement identifies certain triggering events that will activate the provisions of the agreement. Common triggering events include the death of an owner, a permanent disability that renders an owner unable to work, an owner’s retirement, a voluntary decision to sell an ownership interest, or other circumstances agreed upon by the parties.

Purchase price: The agreement defines how the purchase price for the business interest will be determined when a triggering event occurs. This could involve an agreed-upon valuation method or a formula to calculate the price.

Funding mechanism: To facilitate the purchase of an owner’s interest, the agreement often includes provisions for how the buyout will be funded. There are typically three main funding mechanisms:

a. Out-of-pocket payment: The buyer uses their funds to buy the departing owner’s interest.

b. Installment payments: The buyer makes payments over a set period to acquire the ownership interest.

c. Life insurance: The owners take out life insurance policies on each other, and the death benefit is used to fund the purchase of the deceased owner’s interest.

Terms and conditions: The buy-sell agreement may include additional terms and conditions related to the buyout, such as restrictions on selling to third parties, non-compete clauses, and any other specific conditions agreed upon by the parties.