How Valid Is Your Buy-Sell Agreement? – Rea CPA

How Valid Is Your Buy-Sell Agreement?

I have valued more than 1,000 businesses during the past decade. During the valuation process, we often examine the existing “buy-sell” agreement. It’s amazing how many of these “buy-sell” agreements are woefully out of date.

I prepared valuation a couple of weeks ago of a company that was valued at $3 million. The current “buy-sell” agreement that was executed in 1990 stated that the value of the Company was at $50,000. What happens if one of the two shareholders dies? Would it have been fair to their family to obtain $25,000 at his death?

Businesses owners frequently have buy-sell agreements. These are contracts among the shareholders who control what will happen to the stock of the company under certain pre-determined purposes. The purpose of the buy-sell agreement is to control who can be part of ownership in the business and to provide financial resources to the departing shareholder.

You should review your buy-sell agreement on an annual basis from a legal, business and valuation perspective.

From the valuation perspective, the main issue is, “What will the value be when the trigger event happens? Is this fair and reasonable to all parties involved?” These parties include: the departing shareholder or their family, the business entity, the other shareholders and in the case of death, the IRS.

Email Rea & Associates for more information on this important topic.

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 7/18/2007.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.