3 Tips For Drafting A Buy-Sell Agreement
Many small companies are started by two or more individuals working in cooperation with one another. While having partners can make it easier to develop a successful business in today's competitive marketplace, multiple owners can also present a problem if business relationships sour in the future.
All small companies should have a valid buy-sell agreement in place before attempting to generate any revenue.
1. Draft an Agreement Early
One of the most valuable tips you can follow when it comes to buy-sell agreements is to draft an agreement early.
Sit down with an experienced business law attorney and each of the partners involved in starting a small business. Together, you can work out a fair and equitable arrangement that will benefit everyone in the event one partner needs to sell his or her interests in the company.
It's much easier to reach a consensus when all parties are getting along, so make a buy-sell agreement a top priority.
2. Include a Business Valuation Clause
The value of a business is constantly changing. It's impossible to predict market fluctuations that will affect a business' bottom line. As a result, it's critical that you include a business valuation clause in your buy-sell agreements.
A standardized formula might not take into account vital factors that are unique to the industry in which your business operates.
A business valuation clause allows an expert to step in and provide an accurate estimation of the value of your company if any of the partners needs to sell. This clause protects both buyers and the seller from pay discrepancies in owner buyouts.
3. Factor in Tax Obligations
No matter what happens in the day-to-day operations of a small business, taxes must be paid. A buyout can pose a unique tax burden that will need to be addressed when drafting a buy-sell agreement. It's best to work with an attorney who has knowledge of both tax law and business law.
Your attorney will be able to structure your buy-sell agreement to minimize the tax impact on both buyers and sellers. It may even be possible to structure the agreement to allow all parties to pay applicable taxes over time.
By keeping tax considerations in mind from the beginning, a well drafted buy-sell agreement will help you maximize profitability in the event one of the business owners wants to sell his or her shares of the controlling interest in the company.
Learn more about business transaction law services from an attorney today if you're interested in making sure that you understand this area of business and the law.