Tag: Agreement

Buy Sell Agreements

Sanjiv Gupta CPA - 8 years ago
Understanding the Buy-Sell AgreementBusiness owners with partners can protect themself by having a buyout agreement (aka buy-sell agreement) in place. This agreement allows stockholders to purchase partners' interest in the company under certain triggering events such as retirement, or death. The agreement can also be structured so that company partners have the first right to purchase the interest in the company.The common type of buy-sell agreement are:1.) Stock-repurchase agreement2.) Cross-purchase agreementThe first one is commonly used in small businesses. It allows the company to buy out the departing owner's interest. For example, if one of the partners decides to leave the company, his or her stocks can be purchased by the company thereby increasing the share of other partners in the company.A cross-purchase agreement is a bit different. Instead of the company purchasing the stock of the departing partner, remaining owners are allowed to purchase the departing owner’s stock.Who needs a buy-sell agreement?Any business with partners should have a buy-sell agreement in place. This agreement should be drafted and signed as soon as the company is formed. The agreement will protect the owner leaving the company along with partners remaining in the business. A buy-sell agreement can help businesses avoid costly conflicts when the buyout time comes.What methods are used to set the price?Pricing should be based on the evaluation of your business. This is where your CPA will come in. IRS section 2703 prevents a business owner from picking a random low value for the evaluation purpose due to estate planning laws. However, your CPA or lawyer should be able to help you come up with a fixed price agreement.The better way to evaluate your business is to use the valuation process agreement. It is a good idea to engage an independent valuation analyst to determine the fair market value of the business. There is a good chance that a fixed value agreement may undervalue or overvalue your business. However, an independent valuation will get you much closer to the correct number.You can engage an independent valuation analyst on a yearly basis to determine the correct value of your business and update your buy-sell agreement accordingly.Do you have a buy-sell agreement for your business?

Essential Elements For All Business Partnership Agreements

Sanjiv Gupta CPA - 6 years ago
After you have chosen the perfect business partner, it is essential that you cover all your bases when you set up your partnership agreement. If you can afford an attorney, it is a good idea to have one draft of the agreement. At the very least, you should hire an attorney to review the partnership agreement before you sign it to ensure your interest is covered.What Is The Purpose Of A Partnership Agreement?This agreement has many purposes but the two most important purposes are dispute resolution and the business structure. Even the best relationship has disagreements especially when there are a lot of decisions that need to be made. When your partnership agreement is crafted carefully, it will outline exactly how disputes will be handled before they happen, instead of in the heat of the moment.In addition to providing dispute resolution, the partnership agreement forces the partners to think about how the business is going to run and be structured. This can minimize potential misunderstandings and get everyone on the same page from the beginning.Critical Elements That All Business Partnership Agreements Must HaveBusiness Name: The name that the company will be operating under.Purpose: A broad statement of the business’s purpose. Leaving the purpose broad will provide flexibility for the company to adapt over time.Workload Structure: The partnership agreement should include how the workload will be shared. The following questions will help you determine what should be included regarding the partners’ workload:Will the partners be expected to have set work hours?Will all of the partners be working the same amount of time? Or will one partner work less or more than the others?How much vacation time will be given to each partner, each year?Will each partner’s role be full-time or can the partner conduct another type of business outside the company?If yes, what another type of business that is allowed to be conducted?Partner Contributions: Determine exactly what each partner will be contributing to the business such as cash, physical property (office space, equipment, etc.), and intellectual or other property types (client lists, software codes, etc.). After you have all contributions listed, discuss with the other partners what restrictions there will be on those contributions, if any. The following are some examples of the types of things that should be discussed:Client Lists: Does all of the revenue from the clients that a partner brought to the business flow to the business? Or does a percentage of the revenue, from those clients, flow to the partner directly?Personal Property: If a partner brings the property into the business (such as a copy machine, computer or lawnmower) does the property become the business’ property?Intellectual Property: If a partner brings the intellectual property into the business (such as a software code), does the business own it? Are the other partners allowed to modify it?Partners’ Compensation: All partnership agreements should list the terms of each partner’s compensation. The following questions should be discussed to determine what should be included regarding compensation:Will each partner receive a salary? If yes, how much will they receive and when will it be disbursed?If a partner receives less salary, will the difference be made up for in the future?Will the profits be reinvested in the business?If yes, when will profits be taken out?How will profits be divided up between the partners?How will business losses be handled?Ownership: Now that you have determined the contributions, workload, responsibilities, and compensation, you need to agree on how exactly the ownership should be split. This is a difficult calculation and can cause problems between partners before you even finalize the partnership agreement. Things to consider:Money raisedRevenue generatedContributionsOriginal conceptFull-time commitmentReputationBusiness Authority: The partnership agreement should state the authority that each partner has. The following questions need to be answered:Does each of the partners have the authority to enter into contracts (sign) on the business’ behalfWill the business have a line of credit? Depending on the structure of the business that is chosen, all partners may be held personally liable for the business’ creditCan each partner make purchases for the business without first consulting the remaining partners? In general, there is a monetary limit set. The partners must first get the other partners’ permission if the purchase is above the set limit.Death Or Disability: The partnership agreement should state what happens to the partnership if one of the partners dies or if they become disabled and are unable to participate at the same level. To prevent heirs of the deceased partner inheriting a portion of the partnership, partnership agreements normally include a buy/sell agreement.Partner’s Exit: The agreement should state the terms of a voluntary and involuntary exit. The following questions need to be addressed:What will happen if a partner would like to leave the business to pursue other interests?What circumstances would a partner be able to be forced out of the partnership?Dispute Resolution: Even in the perfect partnership, there will be times where the partners are unable to agree about a topic. The partnership agreement should state how disagreements will be handled. That way, when an issue arises, you will know exactly what the determining factor will be. There are many ways disputes can be handled including:One of the partners has the final say on a portion of the business.The vote is based on the percentage of ownershipPartners use an external advisory board to resolve any disputesPartners use a mediator to resolve any disputesPartners agree to arbitration, mediation or litigation in extreme cases New Partners: The partnership agreement should include the process of bringing a new partner in. How will it be decided? Majority vote?Selling The Business: What are the exact circumstances that the business can be sold? This will probably be included in the Buy/Sell Agreement.

Documents and Agreements Used In Day-to-Day Business Transactions

Sanjiv Gupta CPA - 3 years ago
If you are a new entrepreneur, you probably have very little idea about the types of documents and agreements that your company needs in its day-to-day transactions. These contracts are a part and parcel of your business’ life, covering everything from employment agreements to equipment leases.As a business owner, you will come across different types of agreements and documents as you enter new relationships with people involved in your business, including your clients and employees, as well as suppliers of goods and landlords. Of course, you have your own set of expectations from the person or company you are transacting with, concerning what you will give and get, and vice-versa. That is what business contracts and agreements are basically for—to describe and define your and the other party’s expectations from the business relationship that you share. Types of Business Documents and Agreements Every business day, you are likely to run into different types of agreements as you operate your company. So before you launch your business, make sure that you have already drafted all these documents. Here are some of the most basic agreements that entrepreneurs use in their day-to-day business transactions:Letter of Intent. Otherwise known as a “Memorandum of Understanding (MOU),” this is a general term for documents that businesses use in sales. While most LOIs are contracts in their own right, some are not.The purpose of having an LOI is to have both parties—in this case, you and the individual or company you are transacting with—to agree to the terms on that paper, signifying your shared commitment to enter into a deal without actually agreeing to a deal. Simply put, it serves as your agreement to agree. Content-wise, this document is similar to a term sheet, although it differs in terms of structure. How It WorksAs mentioned, the purpose of an LOI is to formalize a preliminary agreement so that before the actual negotiation gets underway, both parties have already understood how things will proceed. Just like contracts, LOIs are up for negotiation. Even if you present an LOI, the other party can counter you either with edits or an entirely new LOI. Despite that, the end product is always the protection of both parties and the fulfillment of the contract which the LOI posts you will agree on.What It IncludesIn most cases, an LOI includes both binding and non-binding provisions. How this document can be binding vary. Most least-binding LOIs include a contractual agreement, treating it as non-binding. On the other hand, a binding LOI usually includes the rules of negotiation of a contract, rendering it as a binding agreement.While some LOIs can have very general content, some types specifically spell out the elements of a deal, including the date when the deal will be completed, who will write the contract, as well as the specific details on financing. Such details are usually approved by the board.On the other hand, there are also LOIs that contain non-disclosure agreements or no-solicitation provisions, which are not very uncommon. Usually referring to specific components of the deal, non-disclosure agreements are where the parties in question agree which information should stay confidential and which should not.Just like non-disclosure agreements, nonsolicitation provisions stipulate that one party cannot hire any of the employees of the other party.Uses of LOIWhile the general purpose of an LOI is to signify the commitment of both parties to a deal, other common uses of this document are:As a means to clarify which of the stipulations of a deal need further negotiationAs a means of confirming that both parties are indeed negotiatingTo protect the parties involved in a dealWho Creates ItWhen you use an LOI in the field of business, the ones to create it are the management and legal counsel of your corporation, which include you. The LOI is most useful when you plan to merge your corporation with another corporation or acquire another corporation. In this case, the LOI serves to outline your plan to take over the other company and disclose the specific terms of your transaction.Master Services Agreement.  As a business owner, you engage with customers on a day-to-day basis. Let’s say your company provides customers with computer hardware and software support. After some time, you conduct a certain project to replace the old information technology system of your client. In that case, the service specifics expectedly change although the service guarantees stay the same. While you have the option of documenting these guarantees in each contract, the best that you have is to have a master service agreement that will cover all these multiple contracts.By definition, a master service agreement is a type of contractual document that spells out the performance objectives and responsibilities of your company and the company you are transacting with. It also includes the current and prospective services covered by the agreement. As it clarifies the roles and responsibilities of your company and the other party, it helps you manage the expectations of your customers.PurposeBasically, the main purpose of a master services agreement is to simplify an ongoing contract negotiation. With this agreement, your company and your customers can work through the general yet significant subjects that may derail your contract. Creating this agreement ahead of a specific contract will allow you to focus more on specific concerns that will be stipulated in the contract, including price and time frame.TemplateUsually, a master services agreement takes weeks, sometimes even months, to negotiate. The length of negotiation hugely depends on the extent of your agreement with the other party and its priority level. Although some companies tend to defeat the purpose of this agreement by using another master services agreement to serve as a blanket document with little discussion, completing this document provides a template for you to use a basis for your future master services agreement, should your need for another one arises.As soon as your company deliberates through the negotiation process, you get to understand the various issues and concerns that usually arise. That allows you to identify and address issues quickly when you are placed in a situation when you need to negotiate a new master services agreement in the future.AdvantagesMany companies suffer from poorly constructed contracts. In some cases, small companies make use of contractual templates by cutting and pasting provisions from an old contract to a new contract. This usually happens when the need to move quickly is there. For instance, when a need for a partnership suddenly arises, or when a prospective client suddenly requests a nonstandard service.When time is not a major concern, the master services agreement helps companies avoid the potential issues that usually stem from contracts that are poorly deliberated and constructed. As you ensure that your master services agreement is well thought out and constructed, you prevent your company from having to deal with contractual disputes in the future, as well as reduce the risk of litigation. This is especially since markets, operating environments and technology are ever-changing.Statements of Work. Usually paired with a master services agreement, a statement of work is used by companies to reduce the complexity and cost of having to negotiate contracts through the use of a core contract that has been negotiated once, and the attachment of individual addenda for discrete engagements. This document is a type of contract that needs to be reviewed and negotiated, although they are generally less critical when compared with the master services agreement. Sections. While most statements of work vary in content, they generally include arguments about the following: This section of the document states the marketing objectives of the project, as well as an overview of the proposed solution.This usually includes deliverables and inline assumptions. Defining the “how” and “what” of a certain story, this section defines the work that is to be done, as well as the process of doing it.Defining “when,” this section should provide a detailed schedule and include all of the touchpoints of the client and its partner. In the statement of work, this section can simply be dropped as a table.This section includes the pricing assumptions, including the payment terms.Key Assumptions. This section documents all the general assumptions that are not related to the scope and are not stated elsewhere in the agreement. You can also use this space to document the key master service agreement terms if you have not executed such with your client.This section includes the signature of your client and the signature of the key executives of the agency who are supervising the project. Invoices. Once you have completed work for your client, of course, you want to get paid. However, asking for money in a way that will not make you look haughty is a tough thing to do. That is what invoices are for. These documents are what business owners like you use to ask your customers nicely for payments. An invoice is a written demand for payment. It is a formal way of asking for money and it serves as a controlling factor for many companies, especially big companies. You send this bill to your customer to establish an obligation on his end to pay for the goods or services that you have provided him. Since it gives a clear record of your sales transactions, this document is one of the most important parts of your bookkeeping and accounting system.SectionsTypically, an invoice includes the following sections:This should reflect the date when you created the invoice. Some business owners tend to leave this blank but don’t. This date is important because it starts the clock ticking on your customer.Names and Addresses. This should indicate the names and addresses of you and your customer. Even in online transactions, you are advised to indicate your physical address and not just your email address, in case the other party needs to send you a document.Contact Names. The purpose of this part is for good customer relations. Not only does it let you know who the company or individual you are transacting with, but it also makes sure that you spell your names correctly.Items Purchased. May it be products or services, you need to provide a description for each. This should include a detailed and specific description of the items purchased, including their quantities and prices.Terms of Payment. This should specify the time when the entire amount you are asking from your customer will be due. For example, you may specify in this part, “net 30 days.” That means that your customer should pay the specified amount in the invoice within 30 days.Invoicing a CustomerWhether you are using a pre-printed invoice or an online business accounting software, the process of invoicing a customer works pretty much the same way. But the most important thing you should remember in invoicing is that you should never invoice a customer or client when you have not yet finished shipping or delivering the product or service expected of you.Here are the steps you should follow when invoicing your customer:Identify your customer and sub-customer, if applicable.If there are any previous document numbers related to the sale indicated in the invoice, include it. Such includes purchase orders or sales agreements.Specify the items sold and delivered. This includes the name of the product or service, including their quantities and rates.If your customer has made any deposits, include it, in the same way, that you should include any discount applied to the invoice.Offer your customer options for the payment method.Include the shipping terms for the products shipped.Indicate the terms of sale.Drafting these documents and agreements before starting your business operations is imperative. As mentioned, you deal with customers every day and your relationship with them is what these documents and agreements cover. A formally signed contract can’t be any weightier than in business, especially for large companies where huge amounts of money are usually at stake in every business transaction.
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