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After years of hard work building a company’s unique culture and shared philosophy, the last thing you want is to disrupt that cohesion. That’s where a buy-sell agreement comes into play. A buy-sell agreement is a tool that prevents unwanted or unqualified buyers from disrupting the operations, culture, or vision of your business.

What is a buy-sell agreement? Simply put, it is an agreement between the owners of a company that ensures smooth transition of ownership and business continuity in the event of a specified event or departure from a partner or equity owner. It’s a tool to specify who can buy your interest, such as co-owners, key employees or third parties.

The agreement allows owners to specify triggering events that would lead to a buy-out, whether by the company, the other owners, or third party. The contract would stipulate the method for valuing those shares as well as lay out the payment terms for the buy-out when a triggering event is met.

What is a triggering event? A triggering event is a tangible or intangible limitation or occurrence which once met, causes another event to occur. In most agreements, there are common triggering events that are used to at least create the foundation of the agreement.

These events can be remembered by the acronym: QFRDDD; which stands for Quits, Fired, Retires, Disabled, Dies or Divorced. These are not the only triggering events owners could use to ensure continuity and security among all owners of the business.

Why should a company have an agreement? This agreement is designed to help partners manage potentially difficult situations in ways that protect the business and their own personal and family interests. But more importantly, it protects the company from outside influence. The process to ensure that the buy-sell agreement is meeting the needs of the business and its owners is by determining the appropriate triggering events that will cause action to take place if met.

Let’s look at some examples as to how a buy-sell agreement could benefit your company:

• A shareholder wants to sell their ownership in the company and pursue other interests. This agreement could stipulate if a shareholder were to quit, the company or other owners have right of first refusal to purchase those shares. Thus, maintaining that no outside influence is brought in.

• The retirement of an employee-shareholder could create potential separation of interests between the shareholder and corporation. There could be different options for how this is handled as you could give the retired employee-owner the option to sell back their shares as that shareholder may desire current liquidity over uncertain future performance of the company.

What are the disadvantages of a buy-sell agreement? There are some disadvantages in a buy-sell agreement that can happen if not properly planned for. The biggest disadvantage is if the owners misunderstand the true value of the business and set an unrealistic buy-back price. Another concern arises when a fixed price in the agreement becomes outdated due to the business’s constant evolution. To prevent these issues, buy-sell agreements should be fluid and updated as necessary.

What’s next? A buy-sell agreement can be a powerful tool to protect your business culture and legacy. In addition to weighing the benefits and disadvantages of an agreement, consider factors specific to your business such as ownership dynamics, your business growth and exit strategy and potential risk factors.

If you want to get the process started or are unsure whether a buy sell agreement is right for your company, reach out to Pinion or your CPA to talk through your goals and needs.

Travis Free, Senior Manager, from Pinion will be presenting on “Getting the Most of Your Managers” on Wednesday, Nov. 1 at 3:00 p.m. Pinion is a business advisory provider, ‘U.S. Top 100’ accounting firm, and global leader in food and agriculture consulting. 

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