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, 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 within the company’s operating or shareholder agreement. Buy/sell agreements provide terms for how and when owners transfer their interests to each other. Ideally, buy/sell agreements are drafted during the formation of the business, while everyone is getting along, before any problems arise, an owner needs to sell his interest or wants to buy another owner’s interests in the company. However, these agreements can be drafted subsequent to formation if necessary as long as the co-owners can come to an agreement on the terms.
Owners usually do not have a right to require a company or co-owners to buy or sell stock. Consequently, absent a buy/sell agreement, conflicts between owners involving stock transfer or sale of membership interests are often resolved through litigation, settlement, or both and may have unintended results.
Without a buy/sell agreement, owners of stock or membership interests may be able to sell, give or transfer their interests to any other party. You may not want to be in business with that party and certain transfers of stock can destroy an S Corporation’s tax election. It is inevitable that the ownership of the company will one day need to change, it helps to get all of the interested parties on the same page from the start through a buy/sell agreement.
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 an owner of the business
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 agreements
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 or as agreed on certain dates
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
2. Promissory note
4. Combination of the above
Other common terms included in buy/sell agreements include: non-compete, non-solicitation and confidentiality issues.