If you are a co-owner of your company and thinking of future ownership changes, then buyout agreement is one of the legal forms that you want to look at. It specifies company structure and ownership responsibility in case either side of co-owners would like to step out of business operation or ownership in the future. Among many things to consider, one of the biggest and important tasks is to determine fair price of the company at the future status. It is not simple to just predict how your company’s value will end up for the next few years.
Agreeing on a fixed price
At some point, you need to decide the company’s buyout price and evaluate its future price and mention in the agreement. When you nail down a company’s buyout price, the most straightforward way would be to make an agreement on the actual fixed dollar price in the buyout agreement.
This pre-agreed value or fixed price will give all of the involved partied a simple and certain way of figuring out company¡¯s fair buyout price. With this method of setting a fixed dollar value, it would not be necessary to consult accountants, appraisers, or even earning figures when the owner’s interest is purchased. You can simply take out the buyout agreement and locate what the fixed amount of price specified in this legal form.
With this fixed price method, the owner’s life can become easier without having to fine tune all the financial figures and consult accountants because of this issue. It helps out the owners draw a clear picture of how the future holds would fan out, how much they could expect to carry when they walk out the company. The owners can easily do estate planning because it becomes obvious how much the agreed value of the ownership interests would be when unforeseen circumstances occur. A fixed price also lets the current owners know the amount of estate taxes would be as well as the cost of life or disability insurance.
It is a difficult task to estimate and pinpoint a fixed price for any company’s true value. Valuing the company’s price requires the owners to have business acumen or at least get familiar with business common sense and rule.
Here is the major problem with fixed price method: Any value you have chosen for your company will be surely outdated soon. The fixed price should be adjusted according to the business profitability and owner’s expectation, depending on the initial outlook and the actual outcomes from the daily operations. And then after few years of successful operation, it would be fair to put a business value on the ability of the company to appeal to the customers and business which is called goodwill.
It is also recommended that you need to revise your agreement periodically. You can do this by preparing a new agreement with a new value or a separate statement, in which case you will need to make sure to attach copies to the buyout agreement so you can reference at any time.