Chapter One of my book, Buy-Sell Agreements for Closely Held and Family Business Owners, is entitled “Your Buy-Sell Agreement Won’t Work.” When I speak of “your” buy-sell agreement, I’m referring to your agreement if you are a business owner. Readers of this blog know, however, that I also talk directly to advisers of business owners. So your clients’ buy-sell agreements likely won’t work, either.
Before we address the why’s of my seemingly bold statement, let’s agree that if I’m right, it is not a very good situation for you, your family, your fellow shareholders or your clients.
My first book on buy-sell agreements was published in 2007. I called it Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions? Its title expressed my very real concern for the state of buy-sell agreements in private (and even public) corporate America. Things haven’t gotten much better since.
Most buy-sell agreements are, indeed, ticking time bombs. There are several reasons for this:
- The owners have not spent any or enough time talking to each other about their business and planning objectives.
- The agreement was written several (or many) years ago, and no one has looked at it since and no one really has any idea what it says or how it is supposed to work.
- The agreement was prepared in the distant past and, believe it or not, all the shareholders did not sign it, leaving its validity in question.
- The agreement doesn’t address important life events that will occur in the lives of its owners. Common events (also called “trigger events”) that are not addressed in many buy-sell agreements include disability, divorce, remarriage, and others.
- If there is a fixed price in the agreement, it hasn’t been updated in years.
- If there is a formula, the formula won’t work in many market conditions and there are no provisions for logical and necessary adjustments.
- If the agreements call for a valuation process, the process is not well-defined and the appraiser(s) who will be retained may have no clue about the kind of value that they should provide. If one appraiser provides a strategic control (very high) value, and the second appraiser develops a nonmarketable minority (very low) value, the chances that a third appraiser can satisfactorily resolve the situation with a third appraisal are minimal to nonexistent. And yet, I have seen this very thing happen on numerous occasions because the language in agreements was not clear.
- If there is life insurance and the agreement does not spell out exactly how the proceeds are to be used, there is potential for argument over whether the proceeds are to be used to fund the purchase the stock of a deceased owner (and not included in value) or to be added to value before determining the purchase price. The value swings can be enormous.
If you think any of these observations are applicable to your buy-sell agreement, then take action right away.
In future posts, we will talk about some of these “time bomb” issues in more detail. Each is deserving of elaboration. Stick with us and you will learn a great deal about buy-sell agreements.
If you can’t wait to learn more about your buy-sell agreement, or if you need to take action right away, click here now and get your copies of Buy-Sell Agreements for Closely Held and Family Business Owners. Share them with your fellow owners. If you are an adviser, share them with your clients.
And keep reading this blog, because we’ll be providing fresh insights as we continue to explore buy-sell agreements and how to make them work