Buy/Sell Agreement: A Critical Contract for Business Owners
If there is more than one owner in your organization, knowing about and having a buy/sell agreement is of paramount importance. Putting the details down on what should happen to the company should a partner leave, retire or pass away will avoid the headaches, costs and emotional stress that can surely ensue if not tackled from the beginning. It is one of the most important documents a partnered company should possess.
Even the strongest business relationships among partners can be tested by retirement, transition or some other form of transaction. A buy/sell agreement sets the parameters for any potential transaction which may take place. It also provides valuable guidance for those inevitable real life situations. It is absolutely necessary in order to avoid potential litigation upon the departure of an owner, as is often the case the leaving owner believes that his shares are worth more than the remaining owners believe they are worth.
A critical factor in a buy/sell agreement is the establishment of the standard of value to be used. One standard, Fair Market Value, is defined by the American Society of Appraisers as "the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and, the latter is not under any compulsion to sell, both parties having a reasonable knowledge of the relevant facts." What this means is that if you have minority shares, the fair market value may be impacted due to a lack of control and lack of marketability. Therefore, instead of your pro rata share of the total value of the organization, you would receive an amount that is substantially less.
A situation happened to one of my clients who had a buy/sell agreement which said fair market value was to be used.