Last week, I gave a speech for the Tennessee Society of CPAs Fall Industry Conference. My objective was to present a short primer on business valuation and buy-sell agreements. Given a limited amount of time and two potentially expansive topics, I broke the presentation into two parts. This post addresses the Buy-Sell Agreement portion of the talk.
I’ve written a great deal about buy-sell agreements on this blog and in my book, Buy-Sell Agreements for Closely Held and Family Business Owners. As always, I recommend that you obtain the book and read it!
Most of the attendees were CFOs or worked in the financial and accounting departments of local businesses. I wanted to leave them with something memorable to think about buy-sell agreements (like cash flow, risk and growth for business valuation).
So I left the attendees with what I called the 3 Rs of Buy-Sell Agreements:
- Retrieve. Go and get your buy-sell agreement. For many, it has been so long since anyone looked at it that no one knows where it is. So go and get it. Retrieve is the first R.
- Review. Every buy-sell agreement should be reviewed periodically. A Buy-Sell Agreement Review should involve several parties, including the shareholders who are parties, the company’s lawyer, the company’s business appraiser, and likely the company’s CPA and maybe the financial planner(s) for the shareholders. The objective is to be sure that your buy-sell agreement will work when it is triggered. Most won’t. So Review is the second R.
- Revise. Most buy-sell agreements, following the kind of Review noted above, will need to be revised while the interests of the parties are in alignment, i.e., they can talk, then get the agreement revised. Revise is the third R of buy-sell agreements.
I also spoke about the three main types of buy-sell agreements, including fixed price agreements, formula agreements, and agreements calling for a valuation process to determine price for transactions. I recounted various problems with fixed price and formula agreements that render them unusable for most situations over time. And I expressed my preference for a single appraiser valuation process agreement where the parties agree on the appraiser at the outset, the appraiser provides an initial appraisal, which becomes the initial price for the buy-sell agreement, and then, the appraiser revalues the company for the agreement every year or two.
In addition, I briefly talked about the elements that are necessary to define a valid valuation for a buy-sell agreement, including the standard of value (like fair market value), the level of value (like financial control), the as of date, the qualifications of appraisers, the appraisal standards to be followed, and issues pertaining to funding. You can find more information about these topics from past posts on this blog and from www.buysellagreementsonline.com.
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.