Buy-Sell Agreements: The GOOD, the BAD, and the UGLY!

All private companies with multiple owners MUST have buy-sell (or other) agreements governing the valuation and disposition of interests.

Like death and taxes, the departure of an owner is inevitable due to death, disability, termination or resignation. Attorneys MUST carefully draft these agreements. Since circumstances change, companies MUST carefully review them at least ANNUALLY. This said, however, it is deeply troubling that a large number of such businesses have outdated, poorly drafted and technically (from an appraiser's point of view) defective agreements governing the valuation and disposition of interests. Business appraisers can strongly back up and enhance sound legal advice with inexpensive, high value-added reviews of these agreements.

Here are some of the things an appraiser can instantly spot. Most agreements use terms that can easily be misconstrued (“fair market value”). Most do not distinguish between levels of value. (They fail to stipulate whether discounts for lack of control and/or lack of marketability apply). Those incorporating formulas (the classic “something times earnings” or, potentially much worse, “book value”) are virtually certain to be outdated and incompletely defined. (What is included in earnings?).

A few incorporate appraisal clauses, but almost none specify that an appraiser be certified and provide clear valuation guidance. Finally, very few agreements mention alternative dispute resolution options such as arbitration and mediation. It is important to note that a buy-sell agreement review may have a limited scope and cost less than a full appraisal (which is a determination of value).

The buy-sell agreement review specifies how value is to be determined.

A full and detailed appraisal (an unambiguous determination of value) is certainly not required, since no transaction is imminent. Instead, limited calculations of value (a rough estimate of value) may be used to validate the buy-sell agreement elements and illustrate their implications to business owners. The cost of such a review is quite modest in comparison to that of a full appraisal. The essential benefit of an appraiser's review will be clearer, better understood and tested intentions, language, mechanisms and consequences. 

Get on the right road today to prepare for that unwanted and unexpected turn that can stop you in your tracks and get you stuck with an inappropriate valuation at exactly the wrong time for both you and your business.