As a business owner, the likelihood is high that you deal with a number of different types of contracts on a regular basis. If you are in a business partnership or the co-owner of a company, there is one type of contract in particular that should be of interest to you: a Buy-Sell Agreement.
To learn more about a variety of legal matters read our legal blog here. To learn more about this type of agreement specifically, check out our previous two parts of this Quick Guide series, The 3 W’s of Buy-Sell Agreements and The Essentials of Buy-Sell Agreements. Below is the conclusion of this series on Buy-Sell Agreements that focuses on how the valuation of your company and other elements figure into your Buy-Sell Agreement.
Quick Guide: Buy-Sell Agreements
Part 3: Company Value and Other Elements of a Buy-Sell Agreement
As can be deduced from the name alone, a Buy-Sell Agreement deals with the potential sale of a business. As such, a valuation method must be stipulated for a variety of sale scenarios, caused by events such as a co-owner death, partnership dissolution, or buyout. A number of different methods are available to determine the value of your company.
It is important that you choose the best method for your situation and to incorporate that into the Buy-Sell Agreement. Businesses can either utilize a predetermined buyout price or formula, or agree to hire a valuation professional to determine the fair market value of the company.
How do I determine the value of my company?
- Agreed Value – The owners can agree upon a predetermined price for the departing owner’s share.
- Book Value – The value of the company shall be its assets minus its liabilities as shown on the balance sheet of the company as of the end of the most recent fiscal year. An individual owner’s share value shall be the aforementioned formula, multiplied by his/her ownership percentage.
- Multiple of Book Value – The value of the company is set at a multiple of the book value (described above). An individual owner’s share value shall be the aforementioned formula, multiplied by his/her ownership percentage.
- Capitalization of Earnings Adjusted for Income Taxes – The value of the company shall be determined on the basis of a preselected multiple of the average net earnings (Company’s annual gross revenue minus annual expenses and any annual federal, state, and local income taxes payable by the company). An individual owner’s share value shall be the aforementioned formula, multiplied by his/her ownership percentage.
- Appraised Value – The value of the company shall be its fair market value as determined by an independent appraiser (mutually selected by the buyer(s) and seller of the ownership interest).
What other elements of a Buy-Sell Agreement should I consider?
- Tag-along rights (if majority shareholder sells stake, minority holder(s) have right to join deal and sell their stake(s) at same terms/conditions as would apply to majority shareholder) and drag-along rights (if majority shareholder sells stake, minority shareholder(s) are forced to join the deal).
- First and second rights of refusal (control who can purchase a share of your company).
- Non-compete clauses (these provisions must be limited in scope as courts generally frown upon such clauses).
- With respect to a Buy-Sell Agreement in a sole-proprietorship, a “key employee” will be the buyer/successor.
To learn more about this type of agreement and how it will benefit your business, as well as any other business law questions you may have, contact our team at Joyce & Dubin, PLLC. You will find that speaking with one of our experienced attorneys about your legal needs can make all the difference for your business.