It is important that businesses with more than one owner have a written buy/sell
agreement specifying what happens when an owner withdraws from the business. A
buy/sell agreement is a contract between the owners (or the owners and the business
entity itself) that establishes rules and restrictions applicable to changes in
The typical buy/sell agreement provides that an owner's interest in the business will
be sold (or at least offered for sale) at a specified price to the other owners
and/or to the business entity itself upon the occurrence of specified events. This
prevents unwanted persons from becoming members of the ownership group and ensures a
ready market for closely held ownership interests. It also provides liquidity to a
deceased owner's family and assures the remaining owners that they will be able to
continue the business without interference from the family of the deceased owner.
Buy/sell agreements also offer estate planning benefits by establishing a value for
the business prior to an owner's death.
Common methods for determining the purchase price under a buy/sell agreement include
(1) establishing a fixed price in the contract, (2) requiring an independent
appraisal, or (3) specifying a formula such as a percentage of book value. Events
that trigger a buy/sell agreement are specified by the owners in the contract.
Generally, buy/sell agreements are triggered by any circumstance that might cause an
owner to dispose of an ownership interest - such as death, disability, bankruptcy or
The best time to establish a buy/sell agreement is now, before a problem develops.
Please give us a call if you would like to discuss the merits of a buy/sell agreement
for your business.
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opinions on specific facts or matters, and, accordingly, assume no liability
whatsoever in connection with its use. The information contained in this newsletter
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avoiding tax-related penalties prescribed by the Internal Revenue Code or (2)
promoting or marketing any tax-related matter addressed herein. © 2014