In situations where you have more than one business owner, it is advisable to have a process to manage an owner`s exit or even the addition of a new business. Many entrepreneurs do not like the idea of having to have a new business partner without having a very important right of review with every decision. What happens, for example, if one of the owners dies and the owner`s spouse plays an active role in the business? In many cases, purchase agreements tend to use «fair market value» as an underlying value condition. This potentially allows the derived value of a purchase-sale contract to be used for the planning of inheritance and gift fees. In this scenario, the deceased co-owner`s business interests would be redeemed at a price by the surviving owners and would be the value that would apply to the declaration of inheritance tax. However, True v. Comm`r (T.C Memo 2001-167) shows that formula methods may lead to conclusions below fair value. Where a court finds that the taxpayer intends to avoid inheritance tax in such a case, it may invalidate such an assessment for the purposes of inheritance tax. To ensure this happens, it is also important that the agreement specifies how the business is bought or sold and who can purchase it specifically. This is particularly important if the event that triggers the agreement is the death of one of the owners, as the agreement should be clear enough to replace any will that the deceased owner had. The most common event covered by a purchase/sale contract is the death of a partner. As I have already used as an example, your business partner probably won`t want to be your spouse`s business partner if you die.
The purchase/sale agreement describes the actions taken after the death of a partner. As noted above, repurchase agreements generally contain an valuation clause with the terms of the buyout and often a definition of value. «Fair value» and «fair market value» are two commonly used definitions of value, but they are distinct and different concepts of art. They have very different effects on the value of the dollar that an accountant or accountant would get to determine the value of an interest in a business. It is therefore important to define the value standard applicable to the repurchase agreement. The ambiguity of a purchase sale contract usually leads to conflicts over the necessary procedures after the appearance of a trigger event and the value at the time of a triggering event. Both the buyer and the seller in the transaction may feel that they are being deceived by the other; Such a conflict can lead to years of costly controversy and animosity between buyer and seller. In the context of a purchase sale contract, there are two types of primary agreements: a purchase-sale contract must not be a separate document. You can include your intentions in your company`s shareholder contract or in your partnership agreement. But don`t assume they`re already in the document. If you already have these documents, it may be helpful to create a new buy-sell agreement that defines your specific intentions or to amend the existing agreement. Whatever the motivation, shareholders can sell or transfer their shares legally and successfully to an owner outside the family, without retroactive effect, if there is no legal agreement that limits it.