BUY/SELL AGREEMENTS AND BUSINESS SUCCESSION PLANNING

The sale of a business to an outsider is rare and can be accomplished by the sale of company stock or membership interests or the company assets.

Sales to co-owners are more common. Generally a company with more than one owner should have a Buy/Sell Agreement in place to provide terms for how the owners can buy or sell their interests to the other owners. These determine the terms for such a sale while everyone is getting along before any problems arise or the need to sell or buy the company from the other owners. You should be prepared as it will end one way or another.

If there is no Buy/Sell Agreement, you will be left to settlement between the parties or litigation. Generally, owners have no right to require a company or co-owners to buy or sell stock. Certain sales/transfers of stock can destroy S-Corporation tax election. It helps to get all parties on the same page from the start instead of once problems arise.

The following are lists of terms that are common to Buy/Sell Agreements:

Events that trigger the sale/purchase in some Buy/Sell Agreements:

1. Death, dissolution, and winding up of co-owner

2. Disability or incompetency

3. Insolvency or bankruptcy

4. Transfer or sale of ownership

5. Breach of Agreements with the company

6. Retirement or stop working for the company

7. Fraud or other acts against the company’s interests

Some potential ways to structure the Buy/Sell

            1. Right of First Refusal

            2. Options to Purchase (this can be at the option of Seller or Buyer)

            3. Mandatory or Required Sale

            4. Purchase can be by company or co-owners

Potential ways to value or determine the price of the ownership interests

           1. Potential buyer’s price

           2. Price set in the Agreement

           3. Book value

           4. Appraisal – estate tax value

           5. CPA determines value

           6. Tax values of assets

           7. Asset value or on-going concern value

Payment terms

           1. Cash

           2. Promissory note

           3. Insurance

           4. Combination of the above

Other common terms included in Buy/Sell Agreements include: Non-compete, Non-solicitation and confidentiality issues.