The story in this post represents a composite from recent discussions with clients revolving around the question – “If a sale in the foreseeable future is a possibility, should you bother to be sure that your buy-sell agreement is in good working order?”
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.
In 2007, I published my first book on buy-sell agreements, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions (now out of print). The audience was business owners as well as attorneys and other professional advisers. In my second book on the topic, Buy-Sell Agreements for Closely Held and Family Business Owners, (published in 2010) I honed down the […]
The creation of buy-sell agreements involves a certain amount of future-thinking. The parties must think about what could, might, or will happen and write an agreement that will work for all sides in the event an agreement is triggered at some unknown time in the future. This post addresses nine important characteristics of buy-sell agreements that are important for business owners and for attorneys advising them.
We continue our discussion of statutory fair value with an outline of the discounted cash flow (DCF) model (or method). The DCF valuation method is a core method within the Income Approach to Value (with the other two approaches being the Asset Approach and the Market Approach). One objective of this series of posts on statutory fair value is to outline sufficient valuation and finance theory so we can begin to examine cases, i.e., judicial interpretations of what fair value means. With the proper background, we will be able to understand and to interpret what the courts have said in the context of valuation theory.
Considering the foundation we have built in the last few posts, we can now, using the total capital version of the Gordon Model, build capitalization rates and multiples for EBIT and EBITDA. We discuss the various assumptions or calculations, which are found on the numbered rows in our example table.
Business owners like to think they know what their businesses are worth. In most cases, unaided by professional valuation guidance, the typical owner will overvalue his or her business. We all like to think we are the exception, rather than the rule, or at the top of the value scale. It just isn’t so for most businesses. And it doesn’t matter what the owners think. In light of that fact, we consider what things do matter and why business owners should have a solid knowledge of what their business is actually worth.
In this post, I explain why I believe that fixed price buy-sell agreements are not workable for most closely held and family businesses. This is as true for large companies as well as much smaller companies. However, if you or your client insists on using a fixed pricing mechanism in a buy-sell agreement, take the steps recommended in this post to maximize the probability of success and minimize the potential for future disputes. My text for this sermon lies in Chapters 9, 13, 14, 16 and 17 of Buy-Sell Agreements for Closely Held and Family Business Owners.
Buy-Sell Agreements for Closely Held and Family Business Owners E-book
Format: PDF
Price: $15.00
Publication Date: August 2010
Buy Now
Mercer’s popular print book Buy-Sell Agreements for Closely Held and Family Business Owners is now available as an e-book.
Buy-sell agreements are among the most common yet least understood business agreements and many are destined to fail to operate like the owners expect. Many, in fact, are ticking time bombs, just waiting for a trigger event to explode. If you are a business owner or are an adviser to business owners, this book is designed for you, providing a road map for business owners to develop or improve their buy-sell agreement.
Buy-Sell Agreements for Closely Held and Family Business Owners (E-book) will be your guide for understanding what your agreement says from business and valuation perspectives. The book includes a comprehensive and yet understandable roadmap for business owners and their advisers. It discusses the three major types of buy-sell agreements – fixed price, formula and valuation process agreements.
Chris Mercer makes a convincing recommendation based on more than 30 years working with business owners and buy-sell agreements. The best valuation mechanism for most successful closely held and family businesses is one calling for a single appraiser that is selected by the parties now (i.e., before any trigger event), and who prepares an appraisal to set the price for the buy-sell agreement. Then, the appraiser will provide an annual reappraisal to reset the price every year (or two at most).
You will want to share this e-book with your fellow owners, your accountant, your attorney and your financial planner. Together you can insure that your buy-sell agreement will not be a ticking time bomb, but that it will provide a reasonable resolution, in terms of pricing, terms and process, if and when it is triggered.
This is the business owner’s self-defense manual. Reading it could be the most cost-effective hour or two you’ve ever invested. Don’t dare sign a buy-sell agreement until you’ve read and pondered the questions posed in this book. Your life(‘s work) may depend on it!
Stephan R. Leimberg
Leimberg Information Services, Inc. (LISI)
Buy-Sell Agreements for Baby Boomer Business Owners (Kindle Edition)
Format: E-Book | Kindle Edition
Price: $2.99
Publication Date: August 2010
Buy Now
The first in the Baby Boomer Business Owner Transition Guide Series, this Kindle e-book speaks directly to the situation facing many boomer business owners – planning for transition. A buy-sell agreement is a transition vehicle, and how it operates when triggered can have a substantial financial and personal impact on the next phase of your life.
Buy-Sell Agreements for Baby Boomer Business Owners is an essential book for all successful business owners. The Prologue of the book, available with Kindle’s “Click to Look Inside” function, explains why it is so important for baby boomer business owners to focus on their buy-sell agreements. The Prologue to the book also provides an overview of what buy-sell agreements are supposed to do and how they should work. It summarizes Mercer’s key recommendation for the type of buy-sell agreement pricing mechanism that he believes is best for most successful closely held businesses.
Readers of this book are provided free access to Mercer’s Buy-Sell Agreement Review Checklist and the Shareholder Promissory Note Checklist.
Chapter 1 provides a story of a baby boomer business owner and how he learns what he and his fellow owners must do to “fix” the problems with their buy-sell agreement. The story may be instructive for you.
Now, dust off your agreement and read it in light of the valuable information in this new book.
- Does your company have a busy-sell agreement? If you do, you need to read this book. And if you don’t, you certainly need to read it.
- Do you know why your buy-sell agreement is not likely to work well if and when it is “triggered?” Read Chapters 2 and 3.
- What are the trigger events for your agreement? Are they adequately identified and specified? Do you know most buy-sell agreements focus on death as the primary trigger event, but death is the least likely thing to happen to you or your fellow owners? Consider divorce, disability, termination, retirement and on…. Read Chapter 5.
- Does your agreement have a fixed price? Is it current? Fixed price buy-sell agreements are a prescription for disaster. Read Chapter 6.
- Is the trigger price for your agreement set by a formula? Do you know that no formula will work all the time? Has it been calculated recently? What adjustments does the formula call for when circumstances change? Read Chapter 7.
- Does your buy-sell agreement have a “valuation process” to determine the trigger price? How will the appraisers be selected? What are their qualifications? How does the process work? Has it ever been invoked? What kind of value (trigger price) will the appraisers provide? Will it be reasonable for you as a seller – or as a buyer – because you won’t know in advance which you will be? Is the valuation language in the buy-sell agreement clear so there will be no misunderstandings? Read Chapters 7, 8 and 10.
- Do you know the best valuation process for the buy-sell agreements of the vast majority of successful businesses? Mercer describes the Single Appraiser, Select Now and Value Now process and why it works to solve the problems of fixed price agreements, formula agreements, and ill-specified valuation process agreements. Read Chapter 11.
- What else can go wrong with your buy-sell agreement? Read Chapter 12.
