Four Real Life Buy-Sell Agreement Examples to Avoid

I’ve reflected on the many buy-sell agreements I’ve reviewed in recent years. Let’s focus on four that have issues with either what appraisers call the “level of value,” or with appraiser qualifications. Any facts have been altered to protect the innocent (or guilty) as the case may be.

  • Family business, buy-sell agreement drafted in the early-1980s. A family member dies and the buy-sell agreement is triggered. Everyone assumes that the valuation called for in the agreement was at the nonmarketable minority level, since the interest involved is about 30%. Upon reading the agreement, it is clear to me that the valuation language calls for an enterprise value, without minority interest or marketability discounts. The family’s estate plan is put in jeopardy.
  • Family business, buy-sell agreement drafted in the latter-1980s. This agreement provides the right to “put,” or to offer shares to other family members at either an agreed-upon price (which does not exist currently) or based on an appraisal process. There are issues in the appraiser selection process and in the definition of value in this agreement. The valuation process calling for as many as three appraisers is rendered problematic.
  • Closely held business, buy-sell agreement drafted in the early 2000s. The agreement calls for an appraisal of the company, i.e., at an enterprise level, but then leaves to the appraiser the decision of whether any valuation discounts apply to a particular shareholder’s interest. There are no agreed-upon qualifications for the appraiser selection process. If a dispute arises, up to two additional appraisers could be used who could also exercise their judgment regarding whether valuation discounts apply. This is a disaster in waiting.
  • Closely held business, recent vintage. This agreement is sensitive to defining an enterprise value in the valuation process, but has later language that raises questions about this conclusion. With no qualifications established for the appraiser selection process, any valuation process is at considerable risk regarding the selection of the appraiser(s). Confused or confusing language results in major confusion in the valuation process.

My challenge to readers is to eliminate obvious problems with your buy-sell agreement that can be easily avoided with regard to selection of an appraiser.

To find out even more about the issues  mentioned in this post, continue to read this blog.  You can accelerate the learning process by getting the book Buy-Sell Agreements for Closely Held and Family Business Owners. Please share the blog with your friends, advisers, and colleagues.  We’ll be providing fresh insights as we continue to explore buy-sell agreements and and how to make them work, as well as other interesting valuation-related issues.