If you are considering buying or selling a business, contact CCASA to ensure that you are protecting your assets and remaining compliant. The buy-sell contract works in one of the following ways: Other life events such as retirement, divorce or even a significant disagreement between owners can also potentially affect your business and each owner`s decisions. Another important, but often overlooked, situation is bankruptcy. If one of the business owners goes bankrupt, it can have significant consequences for them personally and for the company, especially if they are directors. So it`s a good idea to keep the options open to everyone. Spending a few dollars on a clear and unequivocal buy-sell agreement, prepared by an experienced lawyer in consultation with a business valuation expert, is a rewarding price that can help reduce future problems. Small business owners should receive annual updates from a qualified expert prior to the onset of a triggering event, which will help reduce the likelihood of a contentious value and the financial and emotional cost of such a conflict. CPAs, which serve private SMEs with several owners, should ensure that the company and the owners have a buy-back agreement and that this agreement has been verified by competent and experienced professionals. Arbitration proceedings with a legal fee clause are introduced regularly into the agreement, so that costly court proceedings are totally avoided.
See our article on the acid test clause. The opposite problem of evicting the family of the deceased is just as common. In one case, we saw that there were three shareholders and that the deceased owner owned one-third of the business. The spouse was told that there was no money to buy the stock, that he would receive a third of the proceeds if a dividend was paid or if the business was sold… but at the time, there were no plans to sell the business or pay dividends. Desperate, she asked him to buy the stock. They didn`t want it, told her, and a few years later she bought her interest in iron pfennigs on the dollar. Because it was a minority owner and the company is not normally required to hire owners, declare dividends or sell itself, it had no effective power (or money) to fight. They had the right to ignore her, and she owned shares that were worthless.
Book value is an accounting concept and not a measure of economic or financial value; (i.e., the book value of a company`s equity (i.e., the total balance sheet decreased from its total liabilities). The advantage of using book value is that it is a simple method that determines value by looking at a company`s balance sheet. Normally, this balance sheet is compiled by an accountant, but many SMEs only have tax returns for their financial statements and do not have a formal review or even audit. Therefore, purchase-sale contracts with tax returns and book value can enter into a value using accounting information that has not been established in accordance with GAAP. In one way or another, book values are often unrelated to the economic market value of a business. Purchase-sale agreements are an invaluable tool for determining in advance the rights of the remaining and outgoing owners in the event that a party leaves the business. The implementation of a buy-back contract can also be useful in defining a method of determining the value of a business. Since the implementation of a buy-and-sell contract can be complicated on your own, it is advisable to seek the advice and direction of an experienced financial advisor.