The buy-sell agreement is an agreement between the shareholders of a company that ensures the continuity of the business in an unforeseen event such as death, separation, retirement, bankruptcy, resignation or sale of the shares of a shareholder. The main goal is to guarantee the continuity of the company and protect it from any event, circumstance or dispute that could put at risk the operations and the proper functioning of the enterprise. The agreement contains a provision that establishes the price, the terms and conditions so that at the time of any event the agreement is executed and the terms and conditions prevail in the purchase-sale of the shares. This is crucial since it sets the price and avoids any kind of speculation.
There are three alternatives when structuring a valuation in a buy-sell agreement. The first method is to agree a formula among the shareholders (for example, a multiple of EBITDA) to ensure that there are no disputes in the value of the shares when the agreement is activated due to some unforeseen event. The advantage of this method is that it is the most cost-effective and quick alternative to determine the price, although not the most appropriate one from our point of view, since the market conditions could have changed and the formula does not reflect the fair market value at the time of the event.
The second alternative is to hire an expert in business valuations to set a price per share at the time of the event. In our opinion, this alternative is the most appropriate and fair for the parties since it allows a deep analysis and reflects the real value of the actions taking into account the current market conditions and the company. Normally the expert prepares an objective and certified report, according to the method previously agreed between the parties. This is the most just and commonly accepted alternative in most cases.
The third alternative is to establish a fixed price that can be updated every certain time. This alternative is not favored because in practice, most companies do not update the value periodically and doing it internally without the intervention of an expert could affect the value of the shares and therefore, the shareholders. In any case, it is highly recommended to formalize a buy-sell agreement between shareholders before investing capital in a company. Not only is it the most just and reliable, but it also avoids disputes between partners that can result in high legal costs associated with lawsuits and litigation in court.
Please contact us to learn more about how the buy-sell agreement can benefit you.