A buy/sell agreement, or buyout agreement, is essentially a pre-nup for business partners, and if you’re a co-owner of a business that doesn’t have one, you should. A buyout agreement states how the company will buy out a co-owner who leaves the company for any number of reasons, including retirement, a sale, death, or even termination. This legal document protects both the partner who’s leaving and the partner who’s staying and taking over the departing partner’s share of the business. A buy/sell agreement should be written as close to the start of the business as possible, because as the company’s value increases, so does the risk associated with not having one.
A properly written buy/sell agreement will include the financial terms of a buyout, state who will oversee the buyout, and explain how ownership will be transferred. It will also state how the partners will determine the value of the business at the time of the buyout.
A company’s value comprises a whole host of factors, including intangibles, like intellectual property or expected future performance, and tangibles, like office or lab equipment or heavy machinery. This can make it difficult for a business owner to ascertain the true value of his or her business without some help. That’s why it’s a good idea to write into your agreement that you’ll hire an objective third-party appraiser to determine the value of your business and all of its property. By hiring an appraiser, you’ll get a value for your business that will be fair and accurate, and will stand up to scrutiny in a court of law.
Another good practice is to hire someone to perform an initial business valuation, including an appraisal of all machinery and equipment, before the buy/sell agreement is written. This will give the partners a deeper understanding of the valuation process and may help them write their agreement. Check out The Asset Accuracy Resource Center for more information about appraisal and valuation services provided by EquipNet.
A couple of weeks ago, we announced our acquisition of Present Value LLC, a worldwide appraisal and advisory company. Because we’ve significantly expanded our appraisal services with this acquisition, expect us to write more frequently about machinery and equipment appraisal topics in our blog. If there’s a particular topic you’d like to see in this forum, or if you’d like to learn more about our expanded appraisal services, contact us today!