This series, “Ask Chris Mercer,” is derived from the Q&A session of the May 16, 2012 webinar, “Buy-Sell Agreements” sponsored by WealthCounsel and attended by over 600.
Promissory notes are used as a funding mechanism in many buy-sell agreements.
Buy-sell agreements are helpful and used in every industry where different owners have potentially divergent desires and needs – and that includes every industry I have seen to date. Companies that most need and most frequently employ buy-sell agreements tend to share common characteristics
Buy-sell agreements are business and legal documents that are created in the context of business, valuation and legal requirements. We need to engage in future thinking in order that our agreements will withstand not only the tests of time, but also potential challenges from the Internal Revenue Service.
Promissory notes are used frequently as a funding mechanism when buy-sell agreements are triggered. However, most buy-sell agreements reflect very little thought or negotiation regarding the promissory notes that they contain.
Dated buy-sell agreements are worrisome for a number of reasons. Whatever the purposes for creating the agreements initially, it is virtually certain that things have changed since.
DeMatteo Salvage Co. and the DeMatteo families who owned it, were mired in litigation regarding their buy-sell agreement for nearly a decade. Whatever one thinks of the outcome, what’s absolutely clear is that the buy-sell agreement failed miserably ….
Whether because of concern for rocking the boat, perceived self-interest, or lack of understanding, many business advisers continue not to raise the issue of buy-sell agreements. And many, if not most, business owners simply do not give their agreements much, or any, thought.
If companies and their shareholders will pay attention to and exercise the Three Rs of Buy-Sell Agreements, most all of the future problems that will occur at trigger events absent this attention can be avoided. Certainty will be enhanced. Shareholder and corporate planning will be facilitated.
If you are a key person and you know you will always be a buyer in buy-sell agreement transactions, this concept of a key person discount might not bother you. But you may well be a seller one day. That’s no time for a big surprise in valuation.
