Buy-Sell Agreements Facilitate Smoother Ownership Transitions

Buy-Sell agreements reduce turmoil during ownership transitions. The following article describes the benefits of having a buy-sell in place if you are in a business with ownership partners. CFO4VETS offers business valuation services to help structure the terms of the Buy-Sell Agreements. 

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What is a buy-sell agreement? A buy-sell agreement is a legally binding contract between co-owners of a business that
determines the actions if a co-owner chooses or is forced to depart a company and the process of purchasing that person’s share. Let’s explore some questions regarding buy-sells.

1. How would a business owner benefit from a buy-sell agreement?

Every business owner will exit their business at some point, whether it be voluntary or involuntary.
Yet, only about 50% of business owners have a buy-sell agreement in place to govern the terms and process of the exit.

In many cases, the business owner’s largest and most significant asset is the business itself. Suppose something happened
to one of the primary owners. In that situation, it is crucial to ask how the owner’s demise or departure would affect the lifestyle and exit plans of the other owners, the business, and the other interested parties. Are you willing
to share your business with your deceased partner’s heir?

The demise of a primary owner is an excellent example of where buy-sell agreements come into play.  They can remove the speculation regarding the future of your business. Furthermore, a buy-sell can reduce the stress and
the turmoil of what is often an emotional situation.

2. Do you need a business valuation when implementing and triggering a buy-sell agreement?


The short answer is yes. A business valuation when contemplating a buy-sell can be critical.
Valuations help you understand your business’s worth and determine the action path you follow after a buy-sell is activated due to a triggering event. (A triggering event happens when a primary business owner becomes disabled; leaves the company, or passes away)

Suppose there is no stipulation in a buy-sell agreement that requires an updated valuation of the
company after a triggering event. In that case, the surviving owner may be required to pay the amount stated in the original buy-sell, even if that amount no longer accurately reflects the company’s actual worth.

Similarly, the valuation of a company may be different after a primary owner leaves a business. It is essential to know how
your company’s value depends on its current organizational structure.

(3). Who does a business owner talk to when implementing a buy-sell agreement?

A Certified Valuation Analyst (CVA) is a professional business valuator.  A CVA and a trusted attorney are vital in putting
a proper buy-sell agreement in place. Because buy-sell arrangements can be challenging to discuss with a business partner and intricate to organize and implement, a trusted attorney can steer and mediate those difficult conversations.

Protect your business and be prepared for the taxing transition when an owner exits the
business.  Buy-Sell agreements help pave the way for smoother transitions.




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