Has the buy-sell agreement (BSA) you created years ago kept pace with the changes your business has experienced? In this Brief we 1) review the most common changes that your Buy-Sell Agreement should consider, and 2) present a checklist that will help you assess the relevance and viability of your company’s BSA.
People Change
Shareholders are living, breathing creatures. They age. and as they do, they may adjust how much they want to work or what goals they want to work toward. If one shareholder is older than one or more of the others, the commitment to work long hours or the long- term ownership goals of the older and younger shareholder can diverge. Even if shareholders are nearly the same age, they may eperience the same changes simultaneously, or they may not. It’s essential that your BSA reflect these changes.
Company Value Changes
The most common change in the life of a successful business is an increase in value. If certain events occur when a company isn’t worth much, shareholders may be able to buy each other out. As a company becomes more valuable, however, shareholders may not have the financial resources necessary to cash each other out.
To prevent one owner from “gaming” a BSA by selling out when value peaks, they can be drafted to reflect both gradual and rapid changes in value, as well as changes in the buyout terms, such as length of buyout, amount of down payment, mandatory vs. optional purchase.
Ownership Changes
Over time, the ownership of companies can change as new owners buy in and older ones sell out. As these changes occur, the ownership proportions can shift in ways not anticipated or planned by the majority shareholders. It’s possible for a BSA to respond if it permits ownership—but perhaps not voting control—to transfer to the rising generation of owners.
Industries Change
Like it or not, the industries we are in affect the value of our companies. If we’re in a niche or “hot” industry, buyers will pay more for our companies and values reflect that demand. If your industry is experiencing consolidation, the value of your company has likely increased. Similarly, in industries characterized by boom-and bust-cycles, a company’s value changes depending on the phase of that cycle.
Buyout Requirements Change
When you created your company’s BSA, you made decisions based on current conditions and your expectations about whether and which events would trigger an optional or a mandatory buyout. As conditions and your expectations change, so too may your preferences about the events that trigger a buyout and whether a buyout is optional or mandatory. For example, you now may prefer that a child or a key employee have the first option to acquire your ownership when you retire or die, rather than your co-owner.
The Ability to Sell Out Changes
It’s rare for unrelated third parties to make lucrative offers to buy companies with little value. Once a company is valuable, however, the potential for a third party to make an offer becomes a realistic possibility. Does your BSA address what happens if one owner wants to sell and the other doesn’t?
Does it make a difference whether you are the owner who wants to sell or the owner who doesn’t? Given all the possible changes, we recommend that you review your BSA at least annually.
The following Buy-Sell Transfer Event Checklist helps you identify areas of a BSA that may need to be addressed and/or updated. We would be happy to review this checklist with you and, if you wish, your other advisors.
Buy-Sell Transfer Event Checklist
Death of a Shareholder
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Disability of a Shareholder
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Divorce of a Shareholder
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Bankruptcy of a Shareholder
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Retirement of a Shareholder
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Involuntary Termination of Employment
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
Business Dispute Among Owners
Is it included in the Agreement? Yes No
Is buyout mandatory or optional? Mandatory Optional
If buyout can be funded, is it? Yes No
Is the funding adequate? Yes No
Is the ownership proper? Yes No
We are here to Help!
We strive to help business owners identify and prioritize their objectives with respect to their business, their employees, and their families. If you are ready to talk about your goals for the future and get insights into how you might achieve those goals, we’d be happy to sit down and talk with you. Please feel free to contact us at your convenience.
The information contained in this article is general in nature and is not legal, tax or financial advice. For information regarding your particular situation, contact an attorney or a tax or financial professional. The information in this newsletter is provided with the understanding that it does not render legal, accounting, tax or financial advice. In specific cases, clients should consult their legal, accounting, tax or financial professional. This article is not intended to give advice or to represent our firm as being qualified to give advice in all areas of professional services. Business Enterprise Institute, Inc. is a discipline that typically requires the collaboration of multiple professional advisors. To the extent that our firm does not have the expertise required on a particular matter, we will always work closely with you to help you gain access to the resources and professional advice that you need.
This is an opt-in newsletter published by Business Enterprise Institute, Inc., and presented to you by our firm. We appreciate your interest.
