Types of Buy-Sell Agreements

What type of buy-sell agreement do you have?  There are a few different options available that are generally used.  Quite frequently I see a buy-sell agreement that sets a price for the transaction at a later date.   For example, in the buy-sell agreement, the owners will agree that the shares/units will be bought or sold for $X per share. 

Additionally, I frequently encounter buy-sell agreements that set forth a calculation or formula.  For example, the owners will agree that the shares/units will be bought or sold based on a book value multiple or based on an earnings before interest taxes depreciation and amortization (“EBITDA”) multiple or some other variation. 

Finally, there are buy-sell agreements that lay out a lengthy procedure for a business appraisal.  This can include one or more appraisers to determine the transaction price under the agreement.

There are distinct advantages and disadvantages for each “type” of buy-sell agreement. It is worthwhile to identify what type of buy-sell agreement you are dealing with as there can be highly different outcomes in value depending on how the agreement is structured. Business owners should take steps to understand how the entity will be valued and examine if changes to the buy-sell agreement need to be made.