Understanding the Buy-SellA Buy-Sell agreement is a legally binding agreement between the co-owners of a business and it deals with the situation when an owner leaves – either voluntarily or forced to leave the company. In many ways, it is like a pre-marriage contract that determines what happens when the two partners divide. It is also sometimes referred to as a “business will”, since it is the succession of the company during a crisis such as the death of one of the owners. A buy-sell contract regulates what happens when one of the owners of the business is no longer part of the business, but why is it important? The short answer is money: a lot of money is poured into a company`s wealth and cannot simply be sold. If an owner wants to leave (or his death means that his family must be compensated for his share of the business), what is the impact on the capital and wealth of the company? Let`s look at some of the usual “trigger events” that can cause these problems and how they are resolved with a buyback contract. The term “trigger” may have a benign connotation. If A occurs, B is triggered or set in motion. However, most trigger events related to sales contracts are less benevolent. Consider the acronym “QFRDDD” to list the main trigger events for buyback sales contracts: Valuation can be a major source of conflict in each buy-sell. One of the most annoying provisions is to link the valuation to an agreement between owners that will be concluded in the future or on an annual basis. Owners may not be the best value judge.
Most events that “trigger” buy-sell agreements are not pleasant to consider, especially for a group of owners who have just met for a common business purpose. The contract to sell your business can be one of the most important legal documents of your life. It may not seem or feel most of the time, but if and if you need this deal, it can either save you huge sums of money and incalculable stress and suffering, or it can cause you to lose huge sums of money and suffer from incalculable stress. The result depends on whether your purchase-sale contract is well designed or not. And unfortunately, many buyback agreements make one or more surprisingly frequent mistakes. The importance of clear language can be summed up by an example drawn from the authors` professional experience: a sales contract between the owners of a holding company had a clause that summarizes: “The expert will determine fair value and the parties will act on the basis of that value. However, if such a party does not agree with fair value and the transaction has not been completed within 90 days of the date of the expert`s report, the transaction price is fair value added. In this case, “fair value” had some meaning and “fair market value” had a totally different meaning.
The difference between the value calculated on the basis of fair value and the “fair market value” basis was millions of euros. Buyback sale agreements are extremely important documents that, when triggered, can either cause a disaster or save you from one. You can`t afford to wait for a trigger event to find that the agreement is missing in some way. Spending a few dollars on a clear and unequivocal buy-sell agreement, prepared by an experienced lawyer in consultation with a business valuation expert, is a rewarding price that can help reduce future problems. Small business owners should receive annual updates from a qualified expert prior to the onset of a triggering event, which will help reduce the likelihood of a contentious value and the financial and emotional cost of such a conflict. CPAs, which serve private SMEs with several owners, should ensure that the company and the owners have a buy-back agreement and that this agreement has been verified by competent and experienced professionals.