Many entrepreneurs start a business with other like-minded business people and don’t want to think about what happens when one of them dies, retires, or quits. It’s only natural not to want to consider these situations when the partners are flush with the excitement of a new venture. In this environment, the prospect of developing a fully featured buy-sell agreement to cover these eventualities is not appealing. Either no agreement is created or, if there is one, the valuation provisions are often deficient, leaving the shareholders or their families hostage to fortune when the inevitable happens.
Once the business succeeds and becomes a significant part of the net worth of the shareholders, an improperly drafted buy-sell can literally result in a lottery as to which of the shareholders dies first – since in some cases the agreement provides that the remaining shareholder can buy the interest at book value or for a figure based on a formula that does not truly reflect the fair market value of the business at the time of death.
This issue is addressed by Z. Christopher Mercer, one of the leading business valuation experts in the country, in his book, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions? He provides a summary of some of the key points of his book which can be accessed at the following link:
Now is the time to review the buy-sell agreements affecting your clients and figure out what the financial consequences would be if the agreement was triggered tomorrow.
As business valuation experts, we can help in any analysis by providing estimates of the fair market value of a business and the value prescribed by the buy-sell agreement. The difference between the values can often bring home to client the risks they are taking with the equity they have worked so hard to build – and persuade them to deal with the sensitive issues involved in developing a workable and fair buy-sell agreement.