Buy-Sell Agreements: A Primer

Washington Buy – Sell Agreement

For owners of small businesses, the buy-sell agreement is one of the most important pieces of the planning puzzle. The agreement defines the value of the owner’s equity interests in the business.

A Seattle Small Business Law Firm will help owners look at the entire life cycle of the business including the “big D’s”: death, disability, divorce.

A carefully designed Buy-Sell Agreement will accomplish many important objectives of the parties. The following are some of the key considerations:

1. Control

2. Fairness – fairly value and fund the equity interest of a departing owner
a. Valuation Methods:
i. Book value (does not include good will)
ii. P/E Ratio
iii. Appraisal at the time of the trigger event

3. Smooth transition- transitions will be smooth when issues arise

4. Market- insure that all owners have a fair ‘market’ for share at appropriate points of entry

5. Expulsion Rights – insure that owners have the right to expel an owner who is no longer wanted

6. Estate Tax Exposure – To be avoided via effective planning

7. Cash – cash and funding challenges are anticipated and covered

Buy-Sell Life Insurance Planning Options:

1. Redemption Options – Business owns the Policy

a. Down-side: no basis increase for shareholders
b. AMT considerations (Corp making over 5M must consider)

2. Cross Purchase – Owners purchase the policy

a. Shareholders get a basis increase
b. Too difficult if lots of shareholders
c. Not ideal if any of the owners has financial difficulties
d. Tax consequences are not an issue with S-Corps, and other pass-thru entities

3. Wait and See

4. In Trust

For more information on considerations for Buy-Sell Agreements for your business, visit an experienced Kirkland Business Attorney.