Free Buy-Sell Agreement

The Come Along-Bring Along provision provides that the Selling Owner must obtain a two-part offer from the Potential Buyer. Part one of the offer is to purchase the Selling Owner's Offered Units. Part two of the offer is to purchase the Units of the other Owners, to be purchased on the same terms and conditions as part one of the offer. This Agreement allows the user to decide whether or not to include a Come Along-Bring Along clause. If a Come Along-Bring Along clause is included in this Agreement the user can also decide whether or not the Other Owners will be required to sell their Units to the Potential Buyer. If not required, the Other Owners will have an option to sell to the Potential Buyer should it be in his or her best interests.

The Buy-Sell Agreement contemplates that the remaining Owners will individually buy the ownership interest of an Owner who is retiring, disabled, or withdrawing. However, there may be some situations where the remaining Owners prefer that the Company be the buyer instead. Therefore, the Buy-Sell Agreement includes a provision that allows the remaining Owners to assign their purchase rights to the Company for any given purchase transaction. Generally, the decision to assign the purchase rights to the Company should require a super-majority of the remaining owners, perhaps 75 to 100 percent.

When an owner who is also an employee retires from the Company under ordinary circumstances, it is reasonable to provide in the Buy-Sell Agreement that the owner's interest will be purchased by the other owners or by the Company.

However, the other owners may not wish to buy out the interest of an employee-owner who simply retires early. The Buy-Sell Agreement provides that if an employee-owner retires earlier than a stated retirement age or does not give the company at least five years prior notice that the employee-owner wants to retire, then the purchase price will be discounted by a stated percentage (perhaps 5 to 20 percent).

Check with an attorney or employment law professional, if you have any questions about an appropriate age to use as the early retirement age.

An inter vivos transaction is a transaction that occurs between living persons. This type of transaction is different from transactions with a deceased Seller because there are no life insurance policy proceeds that can be used to pay for the Purchase Price. As such, it is advisable to set out payment terms - such as down payment amount, number of monthly installment payments, and interest rate - to pay for the Purchase Price. An inter vivos transaction might take place under this agreement when a living Owner decides to sell or transfer his or her Units to a Potential Buyer.

The Owners can set the purchase price at whatever amount they want it to be. However, unless the manner in which the purchase price is calculated is set forth in the Buy-Sell Agreement ahead of time, the Owners may find it hard to agree on a fair price when later one of them is a seller and the others are buyers.

One common method of valuation is to use "book value" or a multiple of book value. "Book value" is the value of the Company as shown by the Company's accounting records and financial statements. For some industries this is the usual method. For example, banks are often valued at one to two times book value. The Company's accounting firm or tax return preparer may be able to provide good advice as to whether this method would be appropriate for the Company.

Another method of valuation is to determine the "fair market value" of the Company. Fair market value means the amount that a willing buyer would pay to a willing seller in a situation where the seller is not under pressure to sell and the buyer is not under pressure to buy. The Buy-Sell Agreement first gives the Owners the opportunity to set the initial fair market value of the Company. The Owners can update the initial amount on an annual basis.

In addition, there is a mechanism for using one or more qualified professional appraisers to set the fair market value for the purchase price. If the Owners want an easy mechanism for updating the initial amount they can provide for an automatic increase each year that is based on the "short-term applicable federal interest rate" set by the Internal Revenue Service under Section 1274 of the Internal Revenue Code.

1. The Buy-Sell Agreement should be signed by a representative of the Company, perhaps the President or other primary officer. It should also be signed by each Owner. It is not necessary that the signatures be witnessed or notarized.

2. A copy of the Buy-Sell Agreement should be provided to each Owner and a signed original copy should be retained by the Company.

3. It is advisable to have the spouse of each married Owner sign the Buy-Sell Agreement. In the case of divorce, a spouse may have rights under state law that allows the spouse to become an Owner of the Company. Therefore, it is important to have the spouses sign the Buy-Sell Agreement, and it is important to make sure that the spouses understand the terms of the agreement.

4. A lawyer should be consulted regarding any legal questions and about the effect of the Company's state laws on the terms of the Buy-Sell Agreement.The Buy-Sell Agreement will terminate in accordance with the provisions of Article VI or by the mutual agreement of the Owners and the Company. The Owners should prepare a list of the applicable insurance policies to attach as Schedule B (see the Life Insurance section).

The Buy-Sell Agreement provides that the Owners can terminate the agreement if Owners holding at least a stated percentage of the units vote to do so. Similarly, the Owners can change the agreement by amending provisions that they wish to change. It is advisable to provide for a high percentage requirement (perhaps 80 to 100 percent) to better protect Owners with smaller ownership interests.

The Buy-Sell Agreement can be used for corporations where typically the business interests held by the owners will be shares of "common stock". It can also be used for limited liability companies where typically the business interests will be "capital units" or "units." Finally, it can be used for partnerships where the ownership interests are typically referred to as "partnership interests."