What You Need To Know About Buy-Sell Agreements

If you are in business with someone, you should know how to exit the arrangement. A buy-sell agreement is a legally binding document between co-owners of a business that spells out how a business should be transferred if a co-owner leaves the business willingly or is terminated.

“Planning on the front end is the best recipe for avoiding litigation or hard feelings down the road,” says Paul P. Morf, attorney with Simmons Perrine Moyer Bergman in Cedar Rapids, Iowa. “I believe every entity owned by two or more people should have such an ownership agreement.” 

Why should farmers have a buy-sell agreement?

“A buy-sell agreement is a no-brainer when unrelated parties are in business together or when brothers or cousins farm together,” explains Polly Dobbs, owner of Dobbs Legal Group in Peru, Ind. “Upon certain triggers, an owner may be contractually obligated to sell his or her interests to the company or other owners. The company or other owners may have the option to buy those interests or be required to do so.” A buy-sell agreement defines which people or trusts can buy or inherit shares of a business. “This not only protects the family from unwanted partners, it avoids disputes over issues such as an owner’s spouse inheriting shares,” Morf says. “Failing to create an exit plan can lock families together in a mechanism that may have worked for three brothers but works poorly for 25 second-cousins two generations later.”

How do you determine the purchase price for assets?

A farm owned by an entity will need two values: appraisal of the farmland, improvements, equipment and assets; and a business valuation of an interest in the entity with appropriate discounts. The purchase price can be based on an agreement by the owners, a formula or…

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