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A buy-sell agreement helps to create a smooth business succession

On Behalf of | Sep 19, 2022 | Contracts

Many of the owners of privately held businesses are baby boomers who are in the process of transitioning from the working world into retirement.

When a business has multiple owners, a plan for a smooth succession is essential, hence the need for a well-conceived buy-sell agreement.

About the agreement

A buy-sell agreement provides for streamlined business succession when a “triggering event” occurs:

  • An involuntary event such as the death, disability or bankruptcy of an owner
  • A voluntary event such as retirement that prompts the transfer of an owner’s interest

With a buy-sell agreement in place, owners can also prevent outsiders, such as family members, or undesirable businesspeople from achieving ownership status.

Business valuation

Buy-sell agreements will usually specify the terms of a buyout as well as a definition of value. The most commonly used definitions are “fair value” and “fair market value.” The former is a term that attorneys, accountants and the courts often use. The latter is a term that refers to the price set when a property changes hands between a willing seller and a willing buyer. These two terms are examples of content in a buy-sell agreement that can confuse the reader and subsequently lead to ownership disputes.

Unclear language

Ambiguous or unclear language in a buy-sell agreement can result in misunderstandings about the procedures required following a triggering event. The value of the business at the time of a triggering event might also need further clarification. To prevent uncertainties and potential conflict, business owners can seek legal guidance when creating a buy-sell agreement that will establish a smooth business succession plan.