S–t Happens, Be Prepared
If you are a co-owner of a business, let’s hope that you have a buy-sell agreement in place.
Why, you ask? Well, “stuff” happens. The kind of “stuff” that triggers a buy-sell agreement generally falls into five categories, otherwise known as the four D’s and an R: Death, Disability, Divorce, Disagreement and Retirement.
And when that “stuff” happens, something else also occurs: interests of you and your partner(s) diverge. Inevitably one (or more) owners will be buying – and one will be selling shares of the company.
The problem is that as of today, you do not know which side of the fence you will be on. Wouldn’t it be nice to have a plan in place that both parties understand, deem fair and equitable, and agree on – before either becomes the buyer or the seller?
Don’t think that “stuff” will happen to you or your partner(s)? Read on and consider the risk if you happen to be wrong.
Death: Without question this triggering event will happen to you and your partner(s) – you just don’t know when or who will go first. Often life insurance is in place to fund the purchase of shares from the deceased’s estate. That’s great, but common to all triggering events, the key questions will be: “At what price will the shares be purchased? And, how will that price be determined?” (More on this in subsequent articles.)
Disability: A bit more ambiguous than death. Is there common agreement to what constitutes a disability? At what point in time do you initiate the buy-back of shares? These can be very difficult conversations to have with the disabled shareholder or their family. A buy-sell agreement takes the emotion out of the potential transaction.
Divorce: No one wants to be in business with someone else’s ex-spouse.This becomes a non-issue if the buy-sell agreement stipulates a buy-back of the ex-spouse’s shares in the event of a divorce. A good buy-sell agreement takes one potentially huge issue off the table during a divorce – and it is much more palatable than a pre-nup!
Disagreement: Surprisingly, this is one of the biggest reasons that buy-sell agreements are triggered. If there is a disagreement and a shareholder chooses to leave the company, it stands to reason that his or her shares should stay with the company. Otherwise, the disgruntled owner could potentially benefit from the future good work of his prior partners. And besides, who wants to be tied to an acrimonious relationship?
Retirement: Another common reason why buy-sell agreements are triggered.
In all of these situations it is clear that interests have diverged.
- Seller wants a high price. Buyer wants a low price.
- Seller may want immediate liquidity. Buyer may want a lengthy pay-out.
- Seller may want to stay involved. Buyer may want a clean break.
- Seller may not want to leave the business.
- Buyer wants to choose who they are in business with.
Wouldn’t it be nice to have common agreement before anything happens? A solid buy-sell agreement will not only save you time and money when a triggering event occurs, but it will also help preserve relationships that might otherwise go awry.
If you are a partner in a business and would like to talk about a buy-sell agreement, please give me a call. I would be happy to help.