Why your business should have a buy-sell agreement in place
By Rachel Flaskey, CPA/ABV/CFF/CGMA
Building a strong business foundation begins with you, the owner. Having a formal written document to detail ownership transition plans is a best practice that should be utilized by business owners, regardless of when the business transition will be happening. The article below outlines four key benefits of having a buy-sell agreement in place for your business:
Buy-sell agreements protect both you and your
family. In the event of unforeseen circumstances – illness, divorce, or death – they help ensure ownership remains in the hands of those who built the business and that a former owner or owner’s heirs receive fair value for their interest in the company. A buy-sell agreement also benefits you by alleviating uncertainty, helping to maintain business value, and smoothing transitions so that employees and clients feel less impact when a key leader is no longer with the company.
The business remains in the right hands.
A good agreement keeps business owners from finding
themselves in business with a spouse or child who has had no involvement in or knowledge of the company. It also keeps spouses or children from being saddled with obligations of a business in which they are uninterested or uninvolved. The agreement can also enable remaining owners to decide who the next owner might be, as well as prevent or reduce the possibility of an owner selling his or her shares to unwanted parties. They can set terms for the funding of a business and how payments will be made. Buy-sell agreements can even establish a market for what might otherwise be an unmarketable asset.
Determining business value.
Upon a triggering event, one of the biggest contention points is the business value itself. A buy-sell agreement helps alleviate some of the open-endedness, because it includes specific and clear language on how the value of the business is to be determined, including frequency of the valuations and whom the valuations should be prepared by. This sets a process and expectation for all owners, and helps relieve ambiguity should a triggering event occur. Business owners should avoid specifying the use of a particular valuation formula. A formula that produces a reasonable valuation at the time an agreement is put in place will likely not result in a reasonable valuation five or ten years later due to changing conditions within the company, the industry, and the economy.
Reduce emotional turmoil.
Buy-sell agreements are designed to provide an un-biased and pre-determined way of transferring ownership, especially during certain triggering events, such as termination of employment, which may cause adverse circumstances. In the absence of an agreement, the remaining owners, company, and departing owner are left not only negotiating the terms of the transaction but also the value of the ownership interest. These negotiations are not usually friendly and often lead to litigation.
Valuation, accounting, and other financial professionals can play a crucial advisory role, leveraging their experience with similar businesses. If you’re not discussing these issues with your accountant or financial professional – and your business partners -now is the time to begin.
For more information on buy-sell agreements, download the infographic we created with financial information company Sageworks.
About the Author:
Rachel Flaskey specializes in working with clients on business valuation and litigation support issues, including work related to mergers and acquisitions, compliance, estate planning, and family law.
Infographic: 6 Things to Know About Buy-Sell Agreements
Whitepaper: How to Build a Valuation Practice within Your Accounting Firm
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