Buy-sell agreements are prevalent throughout Corporate America. Every successful enterprise with two or more owners has, or should have, a buy-sell agreement.
Too often, however, buy-sell agreements are created and signed without adequate discussion among and between the owners (shareholders, partners, members, or joint venture participants).
Why is this? It can be difficult to talk about difficult issues. So if your buy-sell agreement is flawed, and potentially a ticking time bomb, chances are you share much of the fault with your fellow owners.
Buy-Sell Agreement Problems Begin with the Owners
The fact is there are a few things that only owners of a business can do:
- Only the owners can articulate their business objectives.
- Only the owners can negotiate with fellow owners regarding personal objectives and desires.
- Only the owners can agree on what the trigger events (quitting, firings, retirements, deaths, divorces, bankruptcies, etc.) should be in their particular circumstances, not to mention how the buy-sell agreement should treat each of the different trigger events.
- Only the owners can clearly state what they want to happen when one or more of the trigger events specified in their buy-sell agreements actually happens.
I’m not suggesting that advisers, whether lawyers, accountants, consultants or financial planners, can’t help in the process of discussion regarding buy-sell agreements. They can.
Advisers can help elicit the thoughtful responses from owners and suggest topics for discussion. But only the owners can make the decisions. Because if the owners do not do these things, and let others make critical decisions regarding the specification of buy-sell agreements, they should not be surprised if the agreement does not work like they thought it would.
Different Life Circumstances Lead to Different Perspectives and Needs
Most of us like to think that all the bad things in life will happen to others. As a result, many business owners act like nothing can ever happen to them. But bad things happen to even good people.
Why is it so difficult to talk about buy-sell agreements?
As the chart shows, people differ in many respects.
- Some owners are younger and some are older.
- An owner may have a controlling interest while others have minority interests in a business.
- Some owners are actively involved in the management of a business, while others may be passive shareholders, or may become passive owners with the passage of time.
- With respect to ownership positions, some owners put up cash for their investment and others obtain their ownership through “sweat equity.”
- Still others, over time, may receive their interests through gifts or inheritance.
- In many closely held and family businesses, one or more of the owners is required to personally guaranty corporate debt or other aspects of corporate performance.
All these factors lead to different opinions about what might be important in a buy-sell agreement. And if these differences were not enough, some owners are naturally optimistic, while others tend to be more pessimistic in their outlooks on business and life. Going one step further, health differences among owners can create additional problems or challenges in communication. This is particularly true as time goes on and circumstances change.
Buy-Sell Agreement Problems Can Be Fixed by the Owners
In a previous post, we outlined a number of problems that exist in many buy-sell agreements. The need to talk about agreements is just one such problem. The failure to talk leads to agreements that have omissions, are not updated, have confusing language and, in reality, create massive bets that something bad will happen to someone else first. So what should you do? The solution for problems with your buy-sell agreements lies with you and your fellow owners.
- Think about why your business has a buy-sell agreement and what you hope that it will help you to accomplish.
- Think about your own personal objectives and concerns about what is in your buy-sell agreement. You may surprise yourself if you actually take time to think about it.
- Talk with your fellow owners and with appropriate company officers and directors, even if they are not shareholders. Their perspectives can be helpful.
- Follow the advice of Buy-Sell Agreements for Closely Held and Family Business Owners and begin a thorough review of your buy-sell agreement from business, valuation, and legal perspectives.
- Engage appropriate advisers to help define and refine corporate business objectives, as well as to help you and the other owners define the intersections between your corporate and business objectives.
You Can’t Afford to Delay Taking Action re Your Buy-Sell Agreement
The bottom line is now is the time for you to take action.
When a trigger event occurs, your company and the shareholders will be bound by “the words on the pages” in your buy-sell agreement.
If you don’t know what the words say, or know that they say things that make you uncomfortable, then now is the time to talk. The point is, when a trigger event occurs, it is too late to talk. The interests of the “seller” and the “buyer” (often the company, and sometimes the other owners) will have diverged at that time. If you think it is difficult to talk now, it will be darned nigh impossible following a trigger event!
Based on my more than30 years of experience in dealing with buy-sell agreements, yours is the rare exception if there aren’t business and/or valuation issues that need to be clarified. To find out more about the issues, continue to read this blog. Accelerate the learning process and get Buy-Sell Agreements for Closely Held and Family Business Owners. I recommend getting multiple copies of good books to share with your spouse, your fellow shareholders, or friends you know who can benefit from the messages in them.
And keep reading this blog (and share it with your friends, advisers, and colleagues), because we’ll be providing fresh insights as we continue to explore buy-sell agreements and how to make them work.