So most buy-sell agreements include insurance policies to fund the agreement.
In most cases business owners don’t have the cash readily available to buy out a departing owner. Some also mandate a particular level of assurance (compilation, review or audit) regarding those financial statements. For example, a sound buy-sell agreement will spell out a required end-date for the financial statements that must be used to appraise business interests following a triggering event. In choosing a method, you and your fellow owners should carefully define buyout terms and specify the financial data to be used in the agreement. The agreement will also specify a valuation method for appraising the departing owner’s interest at the appropriate time. Setting ParametersĪ buy-sell agreement sets up parameters for the transfer of ownership interests following any of a number of “triggering events,” such as an owner’s: Plus, the agreement will help to prevent an unfamiliar and perhaps unwanted owner from suddenly joining the business. The owner’s shares may pass on to heirs, but how much are those shares worth and to whom can the heirs sell them?A buy-sell agreement will remove uncertainty by stipulating that remaining owners will buy the ownership interest at a price determined by the stated valuation method. This can create difficult circumstances for businesses when something unexpected happens. Unlike public companies, private ones have no ready or established market on which to sell ownership shares. There are also potential tax consequences to consider. This type of binding contract determines how (and at what price) ownership shares of a privately held business will change hands should an owner depart. Does your business have multiple owners? If so, you need a buy-sell agreement.
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