One day a number of years ago, I received a call from an attorney. On that initial call, he told me about a bizarre buy-sell agreement process that was underway. The attorney represented a company. Based on a buy-sell agreement of some age, an option provided by the agreement had been triggered, and one of the companies had the right to acquire the company at its fair market value.
The pricing mechanism is that part of a buy-sell agreement that defines how the price for transactions triggered under it will be determined. There are three basic types of pricing mechanisms: Fixed price buy-sell agreements. The price at which transactions occur is set by agreement of the parties within some buy-sell agreements. The price is set […]
In a recent conversation with an author, lawyer and business transition planner, the topic of buy-sell agreements for companies that are 100% owned by a single shareholder came up. Nick Niemann, author of The Next Move for Business Owners, was talking about transition and exit planning when the broad topic of buy-sell agreements arose. I’m not sure who mentioned the subject first, but we both agreed that it is a very good idea for a company to have a buy-sell agreement with its shareholder, even if there is only a single owner.
Shotgun agreements are found in some buy-sell agreements, but we do not see them regularly. Often used to break deadlocks between owners, a shotgun buy-sell agreement is an agreement where, upon the occurrence of a trigger event, one party makes a determination of price and the other party chooses whether to buy or sell at the given price. While I don’t recommend this type of agreement, in this post, we discuss some of their common characteristics as well as their advantages and disadvantages.
A recent post by Matt Crow, president of Mercer Capital, on our RIA blog, RIA Valuation Insights, gives me a reason to jump back in to posting here. In his recent post, “An All-Terrain Clause for your RIA’s Buy-Sell Agreement,” he addresses buy-sell agreement pricing provisions for a rapid, substantial change in company performance.
Buy-sell agreements are designed to accomplish one or more business objectives from one or more of several viewpoints: the corporation, the employee-shareholder, the shareholder who is not an employee, and any remaining shareholders. The buy-sell agreement provides for what happens to the shares of owners who leave, for whatever reason, whether favorable or unfavorable. In this post, we walk through several trigger events, accounting for the favorable and unfavorable circumstances, and considerations that impact the company, the shareholders, and the buy-sell agreement.
In the last post, we defined buy-sell agreements, at least in terms of a layman, noted key business issues that must be addressed, confirmed that buy-sell agreements are common to all corporate forms and industries, and profiled the types of companies we are addressing. Now it is time for a quick look at the three main categories of buy-sell agreements.
Buy-sell agreements have been likened to business owners’ prenup agreements. They are certainly not romantic, but buy-sell agreements are among the most important and most neglected of corporate and legal agreements. What is not clearly understood, however, is that they are also business and valuation documents.