One of the benefits of a corporation to stockholders is the free transferability of their ownership interest through the sale of stock. When a corporation is public, it is a simple matter to sell stock through a brokerage account to anyone willing to buy. Privately-held corporations, comparatively, often restrict the sale of stock through a shareholder's agreement and require stockholders to sell the stock back to the company if they want to withdraw their investment. Without an upfront agreement in place, it can be difficult to determine an appropriate value for stock that is not traded on the open market.
Abide by any written shareholder agreement regarding stock buybacks. Privately-held corporations often restrict transfer of stock by implementing a shareholder agreement at the inception of business that requires stockholders to sell stock back to the company at a specified price if they want to withdraw. Invoke the agreement, if one exists. It has the authority of a contract and its terms are binding.
Establish a value for the shares. Absent a written agreement establishing a buyback price, the board of directors and the shareholder must agree on a set value for the stock. Call a meeting of the board. Discuss stock valuation methods, taking into account the initial investment to purchase the stock and any increase or decrease in business operations that have impacted value. Negotiate a fair price. Pass a board resolution authorizing the buyback.
Execute a stock purchase agreement. Draft a sales contract memorializing the terms of the transaction. Include the name of the stockholder, the number of shares to be sold back to the corporation, the initial purchase price, the buyback price and the date of the transaction. Have both parties sign the agreement. Save a copy of the agreement with your records for tax purposes.
Exchange the stock for the agreed-upon purchase price. If the corporation issued actual stock certificates, sign the back to transfer title and deliver the certificates to a representative of the corporation. Accept payment as agreed.
Record the transaction on the corporation's stock ledger. Corporations are required by law to maintain an accurate record of the past and current ownership of its stock, the various sales prices and the changes made in stock ownership over time. This provides proof to the IRS that the transaction was properly reported on the corporation's tax return in case of an audit.