Our expert team is committed to structuring agreements that protect your interests, ensure seamless transitions, and secure the long-term success of your business. Whether you are a new venture or a well-established company, our tailored services provide the clarity and stability you need.
Understanding Buy/Sell Agreements
A buy/sell agreement is a crucial legal document that outlines the process for reallocating an owner’s share of a business if they pass away or leave the business for any reason. This agreement is essential for business continuity, preventing disputes among owners, and ensuring the business operates smoothly under any circumstance.
The Importance of a Buy/Sell Agreement
Ensuring Business Continuity
A well-crafted buy/sell agreement ensures that your business can continue without interruption if an owner exits. It provides clear guidelines on ownership transfer, minimizing disruption and maintaining stability within the company.
Preventing Conflicts
By defining the terms of ownership transfer, buy/sell agreements help prevent conflicts among remaining owners, heirs, and departing owners. This clarity is vital for maintaining harmonious business operations and relationships.
Protecting Your Investment
A buy/sell agreement protects your investment by establishing a fair market value for ownership interests and specifying sale terms. This ensures equitable compensation for all parties and maintains the financial stability of the business.
Key Elements of a Buy/Sell Agreement
Triggering Events
Triggering events are circumstances that activate the buy/sell process. Common triggering events include the death, disability, retirement, bankruptcy, or voluntary departure of an owner. Clearly defining these events ensures that all parties understand when the agreement will take effect.
Valuation Methods
Determining the value of a business interest is crucial for a fair transaction. Common valuation methods include:
Appraisal: Hiring an independent appraiser to assess the business’s value.
Formula-Based Valuation: Using a predetermined formula, such as a multiple of earnings or revenue.
Agreed Value: Owners periodically agree on the business’s value and document it in the agreement.
Funding Mechanisms
Funding the purchase of a departing owner’s interest is a critical consideration. Common funding methods include:
Life Insurance: Policies on each owner provide funds to buy out shares upon death.
Disability Insurance: Covers the purchase in the event of an owner’s disability.
Savings Plans: Setting aside funds over time to cover future buyouts.
Terms of Sale
The agreement should specify the terms of the sale, including payment structure, timing, and any interest rates on deferred payments. Clear terms help ensure a smooth transaction and protect the financial interests of all parties.
Types of Buy/Sell Agreements
Cross-Purchase Agreements
In a cross-purchase agreement, remaining owners agree to purchase the departing owner’s share. This type is straightforward and works well for businesses with a small number of owners.
Redemption Agreements
In a redemption agreement, the business entity itself agrees to buy back the departing owner’s share. This approach can simplify the process for remaining owners, as the business handles the purchase.
Hybrid Agreements
A hybrid agreement combines elements of both cross-purchase and redemption agreements. It provides flexibility by allowing either the remaining owners or the business to purchase the departing owner’s share, depending on the circumstances.
Our Buy / Sell Services
At Jennings & Hawley CPA, we offer comprehensive services to help you structure effective buy/sell agreements:
Consultation and Planning
We start with a thorough consultation to understand your business, goals, and specific needs. Our team will help you identify the best type of buy/sell agreement for your situation and plan the structure accordingly.
Valuation Services
Accurate business valuation is critical for a fair buy/sell agreement. We provide expert valuation services, using industry-standard methods to determine the true value of your business interests.
Legal Coordination
While we are not a law firm, we work closely with your legal advisors to ensure that your buy/sell agreement complies with all relevant laws and regulations. Our collaborative approach ensures that your agreement is both legally sound and tailored to your business needs.
Funding Strategies
Our team will help you explore and implement the most effective funding strategies for your buy/sell agreement. From life and disability insurance to savings plans, we ensure that your agreement is financially feasible and sustainable.
Ongoing Review and Updates
Businesses evolve, and so should your buy/sell agreement. We offer ongoing review and update services to ensure that your agreement remains relevant and effective as your business grows and changes.
Why Partner with Jennings & Hawley CPA?
Expertise and Experience
With years of experience in business advisory and financial planning, our team has the expertise to guide you through the complexities of buy/sell agreements. We understand the unique challenges and opportunities that businesses face and are dedicated to providing solutions that work.
Personalized Service
We pride ourselves on offering personalized service tailored to your specific needs. Our team takes the time to understand your business and goals, providing customized advice and solutions that align with your vision.
Comprehensive Support
From initial planning and valuation to ongoing updates, we provide comprehensive support throughout the lifecycle of your buy/sell agreement. Our goal is to ensure that your business is protected and positioned for long-term success.
Commitment to Excellence
At Jennings & Hawley CPA, we are committed to excellence in everything we do. Our team is dedicated to providing high-quality services, meticulous attention to detail, and a proactive approach to problem-solving.
Buy / Sell Agreements FAQ
Every business that’s co-owned by two or more people needs to have a buy-sell or buyout agreement either at the moment it was formed or as soon as possible. Every day that value is added to the business without a plan for future transactions will increase its financial risk.
Despite the name, a buy-sell agreement has little to do with buying and selling companies. They’re binding contracts between the owners of a company with regard to when and how they can sell their interest, who can buy an owner’s interest, as well as the amount of money that it can be bought and sold for.
These types of agreements become relevant when an owner retires, goes bankrupt, becomes disabled, gets divorced, or dies. It’s a kind of “prenuptial agreement” between the co-owners of a business that guides the buyout process between the owners themselves.
If the situation is bad enough, the bankruptcy trustee could liquidate the business (sell all of its assets) and a portion of it to pay the bankrupt owner’s debt. But to keep the company from getting tied up in bankruptcy court, the owners can sign a buy-sell agreement that requires a co-owner to notify them if he or she is going to file for bankruptcy before starting the process.
In this type of agreement, it will become an automatic offer to sell the bankrupt owner’s interest back to the other owners. The money that was earned from the buyout will go to the bankruptcy trustee, so the business can continue its operations without any difficulty.
You can hire a professional appraiser or use a valuation formula to come up with a reasonable price for that part of the business. You can also look at the financial statements for one or more years. The only problem is that valuing a business at the time of the sale will often lead to the owners using different valuation formulas — all of which can produce different results.
Co-owners need to agree on a unified valuation method while the buy-sell agreement is being formed. This will give the owners a chance to talk about and vote on how a reasonable price for the company should be determined. It will also reduce the chance of any conflicts when a buyout occurs.
Requiring all the money in a single “lump sum” can keep even the most successful company from buying back a co-owner’s interest. That’s why having flexible payment terms built into a buy-sell agreement can be helpful. It can allow a down payment of 1/4 or 1/3 of the buyout price, which can be followed by installment payments for 3-5 years at a reasonable rate of interest.
Buy-sell agreements have been used to reduce estate taxes in intergenerational businesses, where at least one co-owner plans to leave his or her interest in the company to heirs who will remain active within the business. It can help that person to pass the business on to his or her children or other relatives without burdening them with unnecessary estate taxes, which are often caused by an aggressive valuation of the business. It can be helpful to choose a conservative price or valuation method while the buy-sell agreement is being drafted.
A co-owner may decide to leave the business for a variety of reasons. Some of them include the following:
Wanting to retire.
Wanting to pursue other business interests.
Not getting along with the other owners.
Receiving an outside offer for his or her share.
Not seeing the business as profitable or worth pursuing.
A buy-sell agreement will often have rules for how and when the co-owner can provide notice of his or her intent to leave. Hopefully, everyone will walk away pleased (though there are times when a buyout can come with messy circumstances).
Get Started Today
Protect your business and ensure its future success with a well-structured buy/sell agreement from Jennings & Hawley CPA. Contact us today to schedule a consultation and learn how we can help you safeguard your investment, maintain business continuity, and avoid potential disputes. Let us be your trusted partner in navigating the complexities of buy/sell agreements and securing the future of your business.