Some time ago, an attorney called saying he was in the midst of a negotiation with the Internal Revenue Service regarding the enterprise value of a business. The company was in a cyclical industry and the appraiser had used a ten year analysis of historical earnings in developing his estimate of earning power for capitalization. […]
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.
Quality business does not come from quality business appraisal reports. That’s the starting point. Quality business comes from developing reputations (personally and for our firms), building a brand (through longevity, specialization, size, etc.), and developing and maintaining quality relationships (those that can bring or refer quality business).
We are what we think, and if we think about a predetermined goal sufficiently, our minds will work toward achieving that goal. There is cognitive theory science behind all this, but it is amazing what repetition of a goal, or keeping it in front of you, can do.
Differences in standards of value between appraisers (yes, it happens), or differences in interpretation of what a particular standard of value means, can create enormous and seemingly irreconcilable differences in conclusions.
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.
