In practice, a buy-back contract serves several purposes. It provides for an orderly business succession mechanism if an owner decides to transfer his interests following a voluntary event, such as retirement. B, or an involuntary event such as death, disability, madness or bankruptcy. Such an event is called a trigger event as part of a purchase-sale contract. It also gives co-owners or the business entity the opportunity to maintain the option or obligation to purchase interest from an existing owner in order to prevent unwanted third parties or business partners from becoming owners. This is often a useful provision for family businesses. A buy-sell contract consists of several legally binding clauses in the context of a commercial partnership or a separate enterprise agreement or an independent agreement and controls the following business decisions: The purchase-sale contract generally provides that the market value of the outgoing owner`s interests is determined by an agreement, otherwise it is assessed by an independent expert whose finding is binding on the parties to the agreement. Buyback contracts are useful instruments for an orderly transition of stakes in private companies. When properly established and verified each year, they are intended for several useful purposes, such as creation. B an owner`s equity interest in the business as a result of a triggering, voluntary or involuntary event; Limit owners to parties who wish owners not to sell as potential co-owners and counterparties; Making available an agreed price that allows buyers and sellers to act before a dispute arises and there is no distortion of the buyer/seller`s valuation; Providing the agreed terms of the transaction price related to the sale; and additional owners required to comply with the terms of the purchase-sale contract. Most buy-sell agreements are written and verified by experienced lawyers, and these ambiguities will be corrected during this process. Sometimes, however, the owners create buy-sell agreements themselves to avoid the costs of a lawyer (which happened in the case of the example above).
While this can save money in the short term, it can become extremely expensive in the long run. Litigation can cost up to a hundred times more than the formal draft agreement would have cost. The thousands of dollars spent today by business owners could save millions in the future. Sometimes buyback contracts require evaluation only after the triggering event; For example: “After a trigger event occurs, both parties will hire an expert to assess the participation of the owner who sells his shares.