There are several good reasons for creating a buy-sell agreement, but in essence, the goal is to avoid conflict and preserve business interests.
If you believe a triggering event is about to occur, now is the time to work with your ownership-management group to create an effective buy-sell agreement.
What it is
According to the Small Business Administration, there are about 30 million privately held businesses in our country. Many of the owners are Baby Boomers who are nearing retirement and face the decision of either selling their companies or passing them along to the next ownership group. A buy-sell agreement is often used in the latter scenario to ensure a smooth transition.
Buy-sell agreements develop over a triggering event, such as the retirement or death of one of the business owners. The main objectives are to:
– maintain current company ownership and operations
– avoid interference from the family of the exiting owner
– avoid disputes over succession and business value
– provide liquidity for payment of retirement and estate taxes
– provide a smooth transition to the next generation of owners
A cross-purchase agreement allows other owners to buy out the interest of the exiting owner, whereas an entity-purchase agreement allows the company itself to purchase that interest.
A buy-sell agreement can effectively preserve business goals, but it must contain clear, concise language. Any ambiguity can lead to conflict concerning the procedures required relative to a triggering event as well as the value of the business at the time the triggering event occurs. To avoid such problems, most companies present buy-sell agreements for legal construction or review.