If you are considering buying or selling a business, contact CCASA to make sure you are protecting your assets and staying compliant. I always like to say that there are really only a few ways to sell your business. There is the sale of a position of power or the sale of a position of weakness. Some of these buy-sell agreement strategies will help business owners sell from a position of power instead of having to go to the open market and possibly call the outside market to buy their business. Every entrepreneur will eventually leave their business at some point, voluntarily or involuntarily. However, only 46% of business owners have a buy-sell agreement. This is an alarming figure. 3 It is important to ensure that the purchase-sale agreement describes how the purchase is financed. This usually involves taking out an insurance policy covering the specific events described in the agreement. For example, if the agreement covers one of the dying business owners, the agreement may also require the business owners to take out an insurance policy to cover their respective share of the business. When one owner dies, the insurance payment covers the other owner`s expenses for the purchase from the deceased owner in the business.
In recent years, we have received a whole series of questions and plans. In many cases, purchase and sale agreements tend to use “fair market value” as the underlying premise of value. In this way, the value derived from a purchase-sale contract can be used for the planning of gifts and inheritance tax. In this scenario, the business waiver of the deceased co-owner would be redeemed by the surviving owners at a price and would be the value that would apply for the purposes of the estate tax return. However, True v. Comm`r (T.C Memo 2001-167) shows that formal methods can lead to conclusions below fair value. When a court decides that, in such a case, the taxpayer wanted to avoid inheritance tax, it may invalidate this assessment for inheritance tax purposes. Many other factors can help to know if a buy-sell contract is best for you and your business partners. If you would like to know more about a buy-sell agreement and if it is suitable for your business, contact us and contact an advisor now. Some buy-sell agreements use formal valuation clauses that are a simplified mix of accounting information and valuation multipliers.
Examples can be book value, 50% of revenue for the last 12 months, seven times profit or four times earnings before interest, taxes, depreciation and amortization (EBITDA). These formal agreements may result in a mismatch between the transaction price for the outgoing owner and the fair value of that interest. Formal evaluation clauses are superficially the simplest, but the advantages of their simplicity can be outweighed by their imprecision. The advantages and disadvantages of some common evaluation indicators are explained below. I almost always propose that agents do not answer this question, but that they provide information to their clients and that the client`s legal advisors answer the question of whether they should give cross-purchase or entity purchase or some other form of agreement. . . .