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Setting an Asking PriceUsing a Business BrokerSelling a Business During DivorceSelling a Failing BusinessTransferring Intellectual PropertyPreparing an Online Business for SalePreparing for Sale, Two Years OutSelling a Business QuicklyWriting a Selling MemorandumSelling a Business Step by StepSelling a Business With DebtChanges Worth Making Before SellingCross-purchase and redemption · Draft for review
This Agreement is made on among , a company (the “Company”), and the persons named below (each an “Owner”).
holding %, and holding % of the outstanding interests in the Company.
An owner left out is an owner whose stake can go anywhere. The most common gap is a founder’s spouse holding a community property interest who never signed anything, and who becomes on a divorce a party to your business whether anyone intended it or not.
No Owner may sell, assign, pledge or otherwise transfer any interest except as this Agreement permits. Any purported transfer in breach is void, and the Company shall not record it.
Most agreements do, and it is rarely what the owners intended. A founder who dies and a founder who leaves to start a competitor are not owed the same thing. Consider full value on death or disability and a stated discount on voluntary withdrawal within a defined period — and say so, rather than leaving it to be inferred at the worst moment.
On a triggering event the Company shall have the first option to purchase the departing Owner’s interest. If it does not exercise within days, the remaining Owners may purchase pro rata to their existing holdings. If neither exercises in full, purchase of the balance becomes mandatory on the Company.
The price is the fair market value of the departing Owner’s interest at the date of the triggering event, determined by an independent appraiser holding a recognised valuation credential, appointed by agreement within days or, failing agreement, by each side appointing an appraiser and those two appointing a third whose determination is final and binding. The Company bears the cost.
Independent appraisal costs money and takes weeks. It is also the only method that reflects what the business is worth on the day rather than on the day somebody last thought about it.
State whether the appraiser applies a discount for lack of marketability or a minority interest. On a 40% stake those can reduce the price by a third, and silence on the point is the single largest variable in this clause.
The price shall be paid in cash at closing to the extent of any insurance proceeds received in respect of the triggering event, and the balance by promissory note over years in equal monthly instalments bearing interest at % per annum, secured on the interests purchased.
Life insurance is the usual answer for death, and disability buy-out cover exists and is rarely bought. Voluntary withdrawal is almost never insurable, so the instalment terms above are what the remaining owners will actually live with — for five years, while running a business that has just lost an owner.
The Company shall maintain life insurance on each Owner in an amount not less than the value of that Owner’s interest as most recently determined under clause 5, and shall review the sums insured annually against that figure. Proceeds shall be applied first to the purchase price.
The Owners shall maintain a valuation file supporting the method in clause 5, updated not less than annually, each update recorded by written consent appended to this Agreement.
A buy-sell price is not automatically accepted as the value of the interest for estate tax. Under §2703 the agreement must be a bona fide business arrangement, must not be a device to transfer value to the natural objects of the owner’s bounty for less than full consideration, and its terms must be comparable to an arm’s-length arrangement.
Each of those three is tested independently. Treasury Regulation 25.2703-1(b)(2) says so expressly: showing the agreement is a bona fide business arrangement does not establish that it is not also a device. Agreements fail on the second and third tests having comfortably passed the first.
This mostly bites family businesses. Where more than half the interests are held by people who are not natural objects of the owner’s bounty, the regulation treats the requirements as met. Two unrelated founders have far less to worry about here than a parent and two children.
An agreement that is documented, reviewed, and priced by a method two strangers would accept is far more likely to hold. One signed once and never revisited is the one the estate ends up arguing about.
This Agreement is governed by the laws of , without regard to its conflict of laws principles.