Attributes of a well-drafted buy-sell agreement

Although many baby boomers are opting to remain working upon reaching retirement age, there are certain considerations that business owners should make to ensure their companies remain viable in the future. Planning for contingencies does not need to be tied to an exit strategy; however, those who are prudent will develop strategies for addressing situations that have not yet appeared on the horizon.

It is for this reason that business owners look to buy-sell agreements. While this contract can create a path toward retirement by incorporating a succession plan, it can also be used to establish a course of action should a life-changing event take place. According to Rachel Flaskey, senior manager in Baker Tilley, the buy-sell agreement should be seen as "a business continuity tool" to lessen disruption caused by divorce, disease, disability or death.

A well-drafted and timely creation of a buy-sell agreement will contain these elements:

1. It is created in advance of disrupting events.

Contracts that are designed in direct response to pressing matters may be overly influenced by the emotions connected to the life-changing event. Given time to contemplate a future course of action, those involved have the luxury of considering the long-term repercussions associated with the buy-sell agreement. This period of reflection often allows for a more rational discussion between partners. Reacting to circumstances limits the time to be circumspect.

2. It establishes a method for determining the business's value.

In assigning a price for the business upfront, an owner can reduce disputes between partners. The agreement may contain a specific formula for determining the cost or identify an individual responsible for assessing the entity's worth. This estimation allows both buyer and seller to prepare for the cost associated with purchasing the business as well as paying the taxes on the sale of the business. For both parties, financial foresight can limit unnecessary payouts.

3. It clarifies rules governing the transaction.

Buy-sell agreements can include guidelines regarding those permitted to purchase the company and methods of purchase allowed. In creating these stipulations, business owners can incorporate a succession plan and ensure the company transitions to an approved buyer. Establishing purchase options can support the financial interest of the company. In this contract, the seller may state whether the purchase is to be supported through debt, stock, cash or other options.

Creating a buy-sell agreement may not elicit the thrill that accompanies an analysis of the business's latest profit report; however, without this type of arrangement, future earnings may be severely limited.

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