Buy Sell Agreement Considerations

When it comes to running a business, there are a lot of factors to consider. One of the most important considerations is what happens when one of the owners wants to sell their share or pass away. This is where a buy sell agreement comes in. A buy sell agreement is a legal contract between business owners that outlines what happens if one of the owners wants to sell their share or passes away. Here are some key considerations when creating a buy sell agreement.

Valuation

One of the most important considerations when creating a buy sell agreement is how to value the business. There are a few different methods of valuing a business, including market value, book value, and asset-based value. It’s important to decide which method will be used in the buy sell agreement and to define exactly how the business will be valued.

Trigger Events

Another consideration when creating a buy sell agreement is what events will trigger the buy sell agreement. These trigger events can include death, disability, retirement, or a desire to sell. It’s important to define these trigger events and to specify what will happen in each scenario.

Funding

Once a trigger event occurs and a sale is agreed upon, the question of funding arises. The buy sell agreement should address how the sale will be financed. Possible funding options include cash, installment payments, and loans.

Buyer Options

The buy sell agreement should also outline who has the option to buy the departing owner’s share of the business. This can include other owners, the business itself, or a third party. It’s important to determine who has the right of first refusal and how the sale will be structured.

Tax Implications

Finally, it’s important to consider the tax implications of the buy sell agreement. Depending on how the agreement is structured, there may be tax consequences for both the buyer and seller. It’s a good idea to consult with a tax professional when creating a buy sell agreement to ensure that all tax implications are properly addressed.

In conclusion, creating a buy sell agreement is an important consideration for any business with multiple owners. By addressing key considerations such as valuation, trigger events, funding, buyer options, and tax implications, business owners can ensure a smooth transition in the event that one owner wants to sell their share or passes away.