Many buy-sell agreements are written when the valuation mechanism includes several valuation companies. When I recently saw two different buy-sell agreements, the subject was at the forefront of my mind and also triggered some memories. We looked at a buy-sell agreement that was perfectly correct on the day it was signed by a company`s two largest shareholders – more than a decade ago. The agreement states that the parties will reset the value each year. It`s important. Send this article to all your friends who own businesses. They will greatly benefit from taking the time to review their buy-sell agreements. And send this article to lawyers, accountants or other business advisors. They can offer great value to their clients by offering a review of their purchase and sale agreements from a legal and valuation point of view.
The question is whether the results of the formula will be fair to both parties in all circumstances. No rigid formula can realistically determine the value of a company over time based on changing business, industrial and economic conditions. For this reason, many buy-sell agreements use an evaluation process. Many business owners want to create a formula to set the price when a buy-sell agreement is triggered. And many buy-sell agreements do, usually with disastrous long-term results. However, this is not uncommon, as it is a cost-effective alternative to hiring a business appraiser. Almost anyone can fit a few numbers into a formula, whether it`s a book value at the end of the previous fiscal year or 4.5 times an average EBITDA of 3-4-5 years (choose one) – less debt, of course. (I actually saw that the exclusion of debt to determine the value of equity was omitted as part of the formula!) Remember that these are buy-sell agreements – someone will buy and someone will sell.
You just don`t know who it will be when you sign the agreement. Your agreement should work for you and your family, whether you`re a buyer or a seller. And it has to work for your partners and their families (or their shareholders), whether they`re buyers or sellers. Purchase-sale agreements are agreements between and between the shareholders (or partners of any legal nature) of a private company and possibly the company itself. They establish the mechanism for purchasing shares after the death (or other adverse changes) of one of the owners. In the case of corporate joint ventures, they also determine the value of resolutions or circumstances that require one corporate joint venture partner to purchase the other partner. It should be clear that the pricing mechanism in a buy-sell agreement can be important for the outcome of a buying event when it is triggered. Buy-sell agreements exist in many, if not most, closely owned companies of significant size and/or value. And they exist between corporate joint venture partners in several thousand companies. Since then, the company has more than tripled in size and value. However, the note in the buy-sell at the time of signing remains in effect today as it has never been updated.
You probably don`t spend much time thinking about your buy-sell agreements (or those of your customers) at night. Take our word for it, you shouldn`t. You should now, in broad daylight, think about your buy-sell agreement and work to get a clear agreement that works for you and your co-shareholders or partners. Before we conclude this discussion of pricing mechanisms, let`s consider some of the other important points that need to be considered when formulating your buy-sell agreement: The process of drafting a buy-sell agreement requires the parties to address important issues in a balanced way at the beginning. In doing so, they must recognize that each party could be a buyer – in the event of the death of a partner – or a seller. In fact, if you think you`re a seller, it`s actually his estate that will be the seller. This can be difficult to manage. Know this. If these determinants, including the pricing mechanism, aren`t clear in your (or your customers`) buy-sell agreements, they`re the only thing you can think about after a triggering event until the situation is resolved.
Without a clear agreement, it can take a lot of money and a lot of time and cause a lot of hard feelings. Dealing with problems in adverse circumstances will absolutely distract you from the business of running your business. What is so difficult to specify these things? We understand that this is indeed difficult. Owners have a hard time talking to their other shareholders about some of these issues when creating their purchase and sale agreements. It makes people think about things they don`t want to think about. But think about it, we have to do it. Buy-sell agreements (or, in some cases, sales agreements) are more important than most entrepreneurs, shareholders, and boards of directors realize. I`ve often said that buy-sell agreements are written down assuming the other partner will die first – and one of the partners is right! And there are probably other variations on this theme. There are at least two versions of the pricing mechanism for a single reviewer. We never practice law, so this is not legal advice. Rather, they are business opinions. This does not create significant problems – unless something negative happens to one of the shareholders.
In this case, one shareholder would benefit from an advantageous purchase price and the other`s family would suffer a real economic loss. As this point is now open, these shareholders are working to update the document as soon as possible. .