Understanding the Importance of Buy-Sell Agreements to Business Valuation Services

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Editor’s Note: Buy-sell agreements are an integral element in exit planning, which is now a topic of great interest in the valuation community. This article provides an overview of the documents that govern the operation of businesses, and the important role buy-sell agreements play in protecting businesses and the interests of their owners in administering the transfer of ownership interests. In a follow-up article, the authors will delve deeper into the areas of purchase price determination, common pitfalls/red flags/issues, and pertinent case law.

The relationships among business owners and those between the owners and the business entity are regulated by the organizational documents of the business filed with the state in which the business is registered as well as applicable state law. However, particularly in the context of privately held businesses, owners may wish to supplement these organizational documents by executing agreements that set forth how the company should be operated and the owners’ rights and obligations. These agreements can clarify and supplement “standard” entity formational documents. The structure and type of agreements vary with the type of entity, and a summary of the organizational documents and alternative owner agreements for common types of entities are summarized in the exhibit.

Click below to read the full publication, originally published by BVR on their Business Valuation Update.