What Is A Buy Sell Agreement?
A buy and sale agreement is a legal contract that binds parties involved in the agreement which talks about how the business shares. This document can be renewed when a party dies or leaves the agreement. Usually, this document talks and stipulates how the share will be sold to the remaining business partners.
How Does This Agreement Work?
This agreement is generally used when each individual who holds the business retires, dies or exits. It is also purposed to ease the business transition in terms of ownership. In this case, there are two types of agreements which are:
- In a cross-purchase agreement – This document states about the purchase of the shares by the remaining owners.
- In a redemption agreement – The share is bought by the business.
- However, this doesn’t mean that an individual can only opt for one above option, but some of them combine the two with certain portions. And of course, this purchase should cover the legal aspects.
Things You Need To Know About The Buy-Sell Agreement
According to Baker Tilly’s Flashkey, their several things every business owner should know when it comes to the buy-sell agreement, which are:
- Write the agreement at the early times – The best time to create a buy-sell agreement is at a very early time. It is easier to do which when you are also in the circumstances, people have more interest which makes it difficult for you to reach the agreement. However, it is never too early to set an agreement because you always can change some points inside based on the circumstances you are experiencing.
- Business valuation clause – Some business owners often include the formula to state the business valuation. However, this formula might not be applicable in the field. Therefore, it is better if you don’t include it in the agreement. Leave this to the experts.
- Emptional impact – Setting the agreement before the effective date will reduce the emotional impact which can affect the big decision. Furthermore, asking an expert or advisor to evaluate the company every couple of years will help them stay on track.
- The ground rules – The busy sale agreement is not only about the price but also talking about who can’t buy the assets of the business. For example, if you only want certain people such as family to be the ones who can buy it. This is purposed to protect the company from other parties such as lenders to take over your business.
- Valuation method – This is one of the crucial things when writing the agreement. This agreement will determine how complex and simple their business valuation can be. Businesses with complicated operations usually prefer a market-based, total-asset-based, income-based approach.
- Tax implication – There are several ways how the buyback should be structured, so this will not impact the tax payment.
So, that’s all our quick explanation about how to make a buy-sell agreement. Get the sample buy-sell agreement on this page for free.
Buy Sell Agreement Samples