Buy-Sell Agreements

You want to sell your share of a business? How much should you receive? This is one of main areas of contests in small business arena. It’s almost as bad as dieing without any papers! You form a business entity with someone, everything is going well, and now one of you wants to or has to sell your share of the business. This typically occurs in cases of: desire to sell one’s interest, death, disability, retirement, personal bankruptcy, termination, incompetence, divorce, etc. This would be easy to answer had you executed a buy-sell agreement at the same time you entered the business arrangement! However, you’re usually too busy or short of funds at that time and just hope for the best!!!

A buy-sell agreement controls the circumstances under which an owner may sell his or her interest, who is a permitted buyer, and how will the price to be paid be determined. A buy-sell agreement benefits the business entity and its owners by:

  • Allowing the remaining owners to determine with whom they will work and share control of the entity;

  • Preventing outsiders or heirs, whose interests may conflict with those of the remaining owners, from obtaining ownership interest;

  • Ensuring continuity of management and control by the remaining owners;

  • Increasing job stability for minority interest owners and key non-owner employees;

  • Providing for the orderly liquidation of the owner’s interests in the event of death, disability, retirement, or other voluntary or forced withdrawal;

  • Preventing continuing involvement in the business of retired or inactive owners;

  • Creating a market for the shares of deceased, retiring, or withdrawing owners;

  • Generating cash to pay death taxes and estate settlement costs;

  • Fixing the value of the selling owner’s interest, including a minority discount, for estate and gift tax purposes; and
  • Preventing the loss of an S corporation election be preventing a transfer of the interest to an unqualified shareholder (e.g., a corporation) or to a shareholder who refuses to elect S corporation status.

Caution: Estate plans of individual owners must be carefully reviewed to assure that there is no conflict with the buy-sell agreement….otherwise law suits will follow. In many cases more than one attorney may need to be involved in order to avoid conflicts of interest between the parties.

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