May 03, 2022

Understanding Your Buy-Sell Agreement – Part 1

Written by Dalton Hopper, CFE, CVA

We are starting a short series on how business owners and their advisors can prepare an exit strategy by understanding their buy-sell agreement. To begin, let’s start by briefly discussing buy-sell agreements and what business owners, and their advisors, should know.

What exactly is a buy-sell agreement? A buy-sell agreement is a contractual obligation between business owners or partners outlined either with the company’s organizational documents or as a standalone agreement that facilitates the transfer of business interests. At a minimum, this agreement should outline how the price of the interest is to be determined, what events trigger the purchase or sale of an interest in the business, and who is involved in determining the value of the business interest.

Specifically, the buy-sell agreement should clearly discuss on what standard and basis the business will be valued. Is a fixed price, formula, or valuation methodology the best option? Are there discounts or premiums related to the interest and, if so, should they be considered? Finally, based on the standards and basis outlined, how will they impact the business and its operations?

If you need help understanding how your buy-sell agreement determines your company’s value, or what the leading practices are when it comes to outlining a business’ value in a buy-sell agreement, talk to our team of valuation professionals by visiting our website or call us at (833) CPA-BMSS.