ven for the simplest businesses, a Buy-Sell Agreement is crucial. When structuring a Buy Sell agreement 4 high-impact points need to be considered by the business owners.
- Include Appropriate Buyout Triggers:
Events that trigger obligation to buy or sell ownership interest are called buyout triggers. Most common buyout triggers are death, divorce, retirement, disability, and a breach of obligation. Partners, much like marriages, sometimes find themselves with irreconcilable differences. Though most business partners don’t enter the partnership expecting to part ways, it’s best to set rules of engagement up front when things are amicable as to what might constitute and irreconcilable difference. Each of these factors should be discussed when forming the business to provide for clean treatment when situations arise. Not having these triggers ironed out in advance can become crippling to a business if any of the triggers arise and no protocol has been established.
- Establishing a Means by Which Partnership Interests Can Be Purchased:
Choosing the right buy-out mechanism is equally important. It’s great to have the triggers in place, but if a partial or full buy-out of partnership interests become necessary then there needs to be a vehicle for this to take place. This can include pre-determining how seller financing might be applied. In the case of death or disability it can be accomplished through insurance. Sometimes the best price for the selling partner could come through a third party seeking interest in the business. All of these potential occurrences can be the source of serious contention if ground rules aren’t established and clearly adopted at the outset. As businesses increase in value, purchasing a partner’s stake who is leaving or has passed away can be a significant financial burden. Bringing in a third party could be viewed as a major issue for the remaining partner. Working together at the outset or while things are going well to determine the mechanisms for purchasing a partner’s stake upon a trigger event can make executing against that purchase a smooth process.
- Follow Best Practices to Set the Price:
The best practice to finding the right price for your business is through a third-party valuation. This helps each party understand a fair and practical price for the business, which shows the view from both the seller and buyer of the business. As with any negotiation it is best to agree on objective criteria to remove emotion from the equation. A great, independent valuation firm will provide a business valuation that utilizes objective criteria and well established methodologies to determine a truly fair price for a transaction.
- Ensure the Transaction is Tax Efficient:
An additional step is to consult with an advisor who is knowledgeable with tax issues. Factors that can affect the tax liability include how the business is structured and what kind of equity the owner holds. This is best accomplished at the outset or well in advance of any potential trigger event.
Regardless of a business size or structure, business owners are wise to establish a well-crafted Buy-Sell Agreement. Economics Partners is an elite advisor that can work with legal counsel to ensure you do this right at the outset to avoid pitfalls down the road. We can also assist when trigger events occur – providing both valuation and strategic advisory services.