Buy-Sell Agreement FAQ

Questions:

• When does a business need a buy-sell agreement?
• A buy-sell agreement is used for buying and selling businesses, right?
• If a co-owner of a business divorces, can the former spouse ask for part ownership in the business?
• Can a co-owner's personal bankruptcy affect the business?
• What's the best way to value a company when an owner is being bought out?
• What happens if a company needs to, but can't afford to, buy out one of its owners?
• Can a buy-sell agreement be used to avoid estate taxes?

Answer:

What's the best way to value a company when an owner is being bought out?

You can hire a professional appraiser or use a valuation formula to come up with a price using financial statements from one or more years. But the problem is that valuing a business at the time of sale usually results in co-owners seizing on different valuation formulas, which can produce very different results. For that reason, it helps for the owners to agree on a way to value the company in advance in a buy-sell or buyout agreement. This gives owners the chance to discuss and vote on how a reasonable price for the company should be calculated. The fact that a sound method was agreed to beforehand can go a long way to reducing conflict when the time for a buyout comes.