Legal Audit for Buy-Sell Agreement

22-Point Legal Audit for Buy-Sell Agreement

1. Trigger Events: Does your Agreement provides for the 10 critical trigger events?

2. Rigid or Flexible: Is your Agreement a rigid agreement that could create significant income tax issues at the time of a buyout?

3. S-Corporation: Does your Agreement require only qualified shareholders can own stock?

4. Minimum Profit Distributions: Does your Agreement provide for minimum profit distributions to cover quarterly estimated taxes for the owners?

5. Board of Directors: Does your Agreement provide for mechanism to help ensure the proper balance of the make-up of the board of directors?

6. Unclear Value Definition: Is the definition of the term “value” in the agreement unclear and open to conflicting interpretations?

7. Formula Price: Is the formula price in the Agreement appropriate for the type of business?

8. Fixed Price: Does your Agreement provide for a fixed price and, if so, is it outdated?

9. Valuation Determined by Appraisal: Does your Agreement provide that the value will be determined by appraisal and, if so, does it cover how many, who selects, who pays, and what to do if there is a large difference between the appraised values?

10. Fair Market Value: If your Agreement provides that the value shall be “fair market value” how are discounts addressed?

11. Outsider becomes an insider: Does your Agreement allow for an outside third-party (maybe your competitor) to offer an owner a better deal to than you feel is fair value and there is nothing you can do to prevent the sale?

12. Retirement: Does your Agreement provide at what age an owner may retire and at what age an owner must retire?

13. Divorce: Is it possible that your Agreement would create a situation whereby other owners can gain a controlling interest because an owner is going through a divorce?

14. Too Restrictive: Does your Agreement create the possibility of losing in both civil and tax court?

15. Transfers to Spouses: Could you end up working with the spouse of an owner? Could your agreement result in unnecessary estate taxes being due upon the death of an owner?

16. Transfers to Children: Could you end up working with the children of an owner? Could your agreement result in unnecessary income and estate taxes being paid?

17. Children Who Do Not Work in Business: Does your Agreement provides for a child/owner who does work in the business from avoiding the Hotel California syndrome?

18. Down Payment: Does your Agreement specify how much of a down payment is to be made and is too generous for lifetime transfers?

19. After Sale of Business: Does your address what will happen if the business is sold within a specified time frame after a buyout?

20. Covenant Not To Compete: Does your Agreement provides for a covenant not to compete?

21. Lack of Penalty Clause Does your Agreement fail to penalize an owner who violates the Agreement?

22. Dispute Resolution: Does your Agreement adequately detail how disputes among the owners will be handled?