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Business Buy-Sell Agreements

Of common concern to owners of business entities such as corporations, partnerships and limited liability companies is in agreement among the owners concerning the sale and purchase of an owners interest at the time of the retirement or death of one of the owners. In such agreements the owners of the entity agree among each other that the survivors shall have the obligation to purchase the deceased owners interest in the entity and that the estate of the deceased owner shall have the obligation to sell to the surviving owners. Alternatively, the agreement could be that the entity must purchase and the estate must sell the deceased owners interest in the entity.

Of course any buy-sell agreement would require that there be some mechanism for the parties to establish the price to be paid for the ownership interest in the entity. The alternatives are (1) a mutually agreed upon price set forth in the agreement (2) a book value amount allocated among the ownership interests in the entity (3) an appraised value whereby independent appraisers are used to value the interest at the time of the purchase and (4) a capitalization of earnings approach. Different entities and situations may lend themselves to one approach being better than the others.

Another important consideration is how payment of the purchase price is to be made. The purchase price could be paid in a lump sum at the time of the purchase or in periodic payments over a period of time at an agreed upon interest rate. Very frequently the lump sum payment is used in conjunction with life insurance purchased by the owners on the lives of the other owners. If an owner dies the remaining owners have funds sufficient to purchase that deceased owners interest.

Failure to effectuate a business buy-sell agreement would allow the ownership interest of a deceased owner to pass to his or her spouse or heirs who would then control that interest. You may well be in business with a surviving spouse or the children of that deceased owner unless a buy-sell agreement is in place to purchase that interest.