A well-written sales contract is an absolute necessity for many entrepreneurs, especially if the intention is not to transfer a business to the next generation. It may well help avoid potentially catastrophic, controversial and costly quarrels, and it could also generate dramatic tax savings. Your heirs will appreciate the time you have taken to determine the value of the business for both succession and tax, instead of letting the IRS decide, and if you are at the surviving end of a transition, you can avoid some serious headaches yourself. There are different types of provisions or repurchase agreements, (2) the “recovery contract” in which the business agrees to acquire the interests of the outgoing owner, and (3) the “right of pre-emption” which gives the business and co-owners the right to acquire the interest of the outgoing investor before the interest of the outgoing owner is offered to third parties, or, alternatively, , which gives them the right to respond to any third-party offer. A poorly written sales contract can be disastrous for the well-being of a wealthy person`s family in the event of death or disability. Here`s why. Adam and Eve, Romeo and Juliet, Abbott and Costello, Sonny and Cher, Ford and Firestone are inevitable examples of disagreements, deaths, quarrels, divorces and break-ups in partnerships. Even the Ford-Firestone relationship, which lasted nearly a century, ended in divorce. To quote one client, “There are two ships I try to avoid — sinking ships and partnerships.” The most common provision in a purchase-sale contract creates a restriction on an owner`s ability to transfer part of his or her business interest to a new owner. An example of total restriction would be to prevent a transfer of shares in an S company to a person or an agreement that would result in the company losing its status as an S-company. More often, family businesses want to limit ownership of the business to direct family members. It is important to note that limiting eligible purchasers may affect the value of commercial interests, as the pool of potential buyers is smaller than it would have been in the absence of such restrictions.
The purchase-sale contract provides for the right (or obligation) to transfer ownership units after the arrival of many potential trigger events and creates a financing mechanism for these transfers. Trigger events include: Sale-for-sale agreements are generally available in two variants: buying an entity and cross-buying, each with pros and cons. A business purchase agreement binds the company to the purchase of shares from an outgoing owner, while a cross-purchase binds the remaining owners individually.