One of the most important business planning documents you can have is a buy-sell agreement. This type of agreement provides direction to owners and other stakeholders in certain situations where the transition of an ownership interest in a business is in question. Typical “triggering events” that activate a buy-sell agreement are:
- The death of an owner
- A disability of an owner
- The divorce of an owner
- The exit of an owner (voluntary or involuntary).
If you have taken the step of developing a buy-sell agreement for your business – CONGRATULATIONS! This is a significant business planning action that many business owners think about but never get around to taking.
The key is to not only have a buy-sell agreement but to make sure that it accomplishes what it was intended to achieve. These agreements can go a long way toward reducing uncertainty and indecision during times of high emotion. However, the agreement must answer certain key questions to provide the direction and comfort that’s expected.
Buy‐sell agreements that are believed to be comprehensive and definitive can, in some cases, create as many questions as they answer. A primary benefit of having this agreement is to avoid having to make decisions that could lead to disagreements at an inopportune time. Unanswered questions can render the buy‐sell agreement ineffective, and fail to accomplish the intended purpose.
This is the first in a series of posts that will provide insight into five important questions your buy-sell agreement must answer to be effective. Those five questions are:
- What type of value estimate is required?
- When should the value be measured?
- Does the company need to be valued, or just an ownership interest?
- Should the buyout’s funding mechanism be taken into consideration in the value?
- How will the value be determined?
Year-end is a perfect time to revisit your key business documents and make sure they are current. Make these five questions a part of that review.
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