How does the buy and sale agreement work?
The Buy Sell Agreement is a legal agreement between co-owners of businesses to ensure the continuity of the company in the event of an event such as death, disability, divorce, retirement, bankruptcy, sale of shares or disagreements between shareholders. The purpose is to achieve business continuity by following a planned transition and avoid putting operations at risk and preserve its proper functioning.
The agreement must contain a clause that establishes the formula or method, depending on the industry, to be used to value the company as well as the terms and conditions of payment. At the time any of the possible events considered in said agreement occurs, it is activated and the terms and conditions of payment prevail to achieve the purchase-sale of the business. This is crucial since having set the price by formula or agreement is intended to avoid any type of speculation that could cause possible legal problems.
At the time of valuing the company, it will also be necessary to review the spreadsheets of the last 3 - 5 years, the financial statements, clearly understand what is the percentage of participation of each owner and review the marital status of each one since, by virtue of the current state of law, a married owner must consider the participation of his spouse in the business; In the same way, the impact of the inheritance law in said society must be analyzed since, if there were minors, the scenario could be greatly complicated.
When structuring and drafting a Buy-Sell Agreement, it is necessary to review the by-laws and those agreements of shareholders or partners in force to ensure that no previously agreed clause is violated and, if they have to be amended, to be able to consider them in the analysis. Another important piece of information is that stock certificates and those insurance policies that have been signed in the name of the owners of the company should be reviewed.
In any case, it is highly recommended to formalize a Buy-Sell Agreement between co-owners of a business since, without proper planning and professional advice, hundreds of hours of effort dedicated to creating a predictable source of income to provide future financial security such as retirement as well as continued income for the family.
