Buy-Sell Agreements that Work
Successful entrepreneurs seek to when an ownership change is needed.
The forecast and prepare for tomorrow’s lack of comparable markets for closely-held challenges by putting systems in interests adds complexity to the process. place today. Sadly, many otherwise Additionally, transition situations often savvy owners fail to complete the business create a conflict of interest between the life-cycle and plan for the twilight of their business. This can shorten the life of the business, create costly and time-consuming lawsuits, and result in costly tax consequences.
An essential tool for business succession is the buy-sell agreement, a contract preemptively detailing how ownership transfer, valuation, and other succession decisions will be structured before any such events occur. These agreements ensure contentious issues are dealt with fairly and accurately, remove uncertainty in crisis situations, and safeguard the future health of the business.
Buy-sell agreements should be customized to meet the needs of the respective owners but will answer these universal questions:
- What succession events; e.g., death, disability, or retirement, may affect the future of the business?
- Who will ownership interests be trans- ferred to; e.g., outside party, children, or existing partners?
- How will the business be valued if an interest is to be transferred?
- How will the transfer be paid for; e.g., cash, owner life insurance, or bank loan?
- Will the agreement be enforceable before the courts and IRS?The most problematic of the aspects listed above is the valuation of the business when an ownership change is needed. The lack of comparable markets for closely-held interests adds complexity to the process. Additionally, transition situations often create a conflict of interest between the existing and remaining partners. Finally, if the valuation is not based on enforceable methods it may be overthrown by the courts or IRS, disrupting cash flows and creating tax liabilities.
Being in business involves dealing with uncertainty.
The buy-sell agreement acts as a road map in case the worst were to happen or to close out a profitable venture. It allows business owners to make sure future succes- sion decisions will be well thought out, fair, funded, and will allow the business to transi- tion in a healthy manner.
Olsen Thielen CPAs’ valuation experts attorneys, and other business advisors to prepare conclusive, detailed, and credible valuation reports that will bear the scrutiny of litigation or IRS examination and assist in decision making. Their seasoned practitioners have diverse backgrounds in finance and accounting, extensive experience providing valuations for a wide range of industries, and have been awarded the Certified Internal Auditor (CIA) and Accredited in Business Valuation (ABV) designations