Prepare for valuation issues in your buy-sell agreement

Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play. Issues, what issues?

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute. The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible.

A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably. Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve. What are our protocols?

At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:

  • How “value” will be defined.
  • Who will value the business?
  • Whether valuation discounts will apply.
  • Who will pay appraisal fees?
  • What the timeline will be for the valuation process.

It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical. Are we ready? Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong.  Additionally, once the appropriate documents are put in place, business owners may have a tendency to put it in a drawer out of sight. The agreement should be considered a “living document” and the valuation formulas should be tested periodically to make sure that the original criteria are still a good basis for the agreement. It is much easier to discuss the issues when it is an exercise and not an actual triggering event.

So try and be prepared for the unexpected, the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components (and some occasional testing) the easier it will be to resolve issues when they arise.

Ensuring a peaceful succession with a buy-sell agreement

Ensuring a peaceful succession with a buy-sell agreement

A buy-sell agreement is a critical component of succession planning for many businesses. It sets the terms and conditions under which an owner’s business interest can be sold to another owner (or owners) should an unexpected tragedy or turn of events occurs. It also establishes the method for determining the price of the interest.

This may sound cut and dried. And a properly conceived, well-written buy-sell agreement should be — it is, after all, a legal document. But there’s a human side to these arrangements as well. And it’s one that you shouldn’t underestimate.

Turmoil and conflicts

A business owner’s unexpected death or disability can lead to turmoil and potential conflicts between the surviving owners and the deceased or disabled owner’s family members. Such disorder has the potential of disrupting normal business operations and can result in instability for employees, customers, creditors, investors and other stakeholders.

A buy-sell agreement ensures that an owner’s heirs are fairly compensated for the deceased owner’s business ownership interest based on a predetermined method. The other owners, meanwhile, don’t have to worry about the deceased’s spouse (or other family members) becoming unwilling (and unknowledgeable) co-owners. And employees will benefit from less workplace stress and disruption than would otherwise be caused if an owner dies or becomes disabled.

Spousal matters

Indeed, among the worst potential succession-planning scenarios is when a deceased or disabled owner’s spouse becomes an unwilling participant in the business. Without a properly structured buy-sell agreement in place, the spouse could be thrown into this situation — even if he or she knows little about the business and doesn’t want to actively participate in running it.

There’s also the less tragic, though still difficult, possibility of divorce. When a business owner and his or her spouse decide to end their marriage, the ramifications on the business can be enormous. A buy-sell helps clarify everyone’s rights and holdings.


Great benefits

Ownership successions are rarely easy — even under the best of circumstances. These transitions can go much more peacefully with a sound buy-sell agreement in place. Please contact us at 216.524.8900 with the tax and financial aspects of drawing one up.

© 2017