As business owners, you are busy bringing in new customers, taking care of existing customers, grooming employees, managing inventory, analyzing financials and the list goes on. When do you take the time to focus on succession planning, your 5, 10, or 20 year plan, expanding to a new location or developing a new product or service? Being a responsible business owner means you must pay attention to all of the day-to-day details, but it also means that you need to ensure the long-term health of your company.
When do you talk with your partners about what happens should the “proverbial bus” hit one of you? My intent is not to scare you! However, to be honest, my intent might be to make you a little uncomfortable if you have not (a) thought about it, (b) discussed it with your partner(s), or (c) worked with your attorney to create a document that outlines all aspects of what you wish to occur should one of you becomes disabled or dies.
If you already have a buy-sell agreement in place, kudos to you! However, I caution you from simply “checking the box” that you have an agreement. If it has been more than five years since you and your partner(s) have reviewed the agreement, and certainly if it has been more than ten years, it is time to pull it out of the file cabinet, brush the dust off it, and ensure ALL components are still applicable.
A buy-sell agreement outlines the steps that will be taken if an owner leaves the business, sells his/her shares, retires, or passes away, for example. These are called “triggering events.” It is a contract among shareholders that determines what happens to the business equity using previously determined understanding among the owners. The objective is to create a document that is well thought out and very specifically outlines a set of instructions of what to do when triggering event occurs. The whole point of having a buy-sell agreement is to prevent misunderstandings and keep you OUT of court! It is not the time to be vague! The agreement should not need interpretation. If the language is vague and you find yourself in court against your partner, it doesn’t matter what your intent was. The judge or the jury will decide how things will happen. Do YOU want to decide or do you want a JUDGE to decide?
Your skilled attorney will assist you with overall agreement including specifics of the transactions in the occurrence of a triggering event. That is his/her area of expertise. Work with a skilled and credentialed valuation analyst to determine the price of the stock when the triggering event occurs. The agreement can incorporate a formula to determine the stock price or it can simply state that a qualified business appraiser will determine price. Because appraisers employ significant judgment, I have seen agreements call for appraisals from two different business appraisers, of which their concluded values will be averaged. While this is an option, it may be too expensive for your situation.
Tip: Work with a skilled attorney who will listen to your wishes and concerns.
In my next article, I will outline options for determining stock price in the occurrence of a triggering event and components of value that need to be considered and outlined in a buy-sell agreement. Please stay tuned for my next article outlining more detailed information of buy-sell agreements from a business appraiser’s perspective!