Regardless of an entrepreneur’s plans for a new company, the potential for the business to eventually be sold should be considered from the outset. Owners who are starting a company that they wish to eventually pass on to a family member may be wise to outline the provisions for this transaction well ahead of time. However, other provisions may also be important as one’s initial plans may not come to fruition.
Buy-sell agreements benefit family businesses
A private family business may face a change of ownership for many reasons that were not planned, at least not at the time they occur. These include a serious illness, disability or death of the owner. Having a buy-sell agreement in place already may prevent unwanted external parties from attempting to take over the business and give family members or existing employees the opportunity to purchase the company.
The CPA Journal indicates that this type of agreement should outline multiple scenarios including granting one entity the first right of refusal to purchase the business. Put rights allow an owner to demand that the company be purchased from them for a portion of the current fair market value, resulting in the purchase of the company at a loss. Call rights allow the company to purchase the owner’s share of the company for a value greater than the current fair market value.
Determining fair market value not always easy
As explained by Forbes, there are multiple ways that a business’ fair market value may be determined. These include assessing businesses of similar size, age, growth rate and in the same market. Other methods also include a means of factoring in any debt associated with the company.