The business continuity agreement is the single most important document that the owners of a closely held business will ever sign. This agreement (also known as a buy-and-sell or buy-sell agreement) controls the transfer of ownership when certain events occur. These events include: the death or disability of a shareholder, an involuntary termination or retirement of a shareholder and even (yes they do happen) disputes among owners.
In this four-part series of articles about buy-sell agreements, we assume that, like most successful co-owned companies, your company has, in place, a buy-sell agreement. In our experience, however, many, if not most, of these agreements do not reflect either the current circumstances of the business or the owners' current wishes regarding business continuity. When that is the case, an outdated buy-sell agreement may cause more problems than having no agreement at all! Let's examine why.
Your first buy-sell agreement (and maybe the one you still have) was likely created when your business was in its infancy, had little value and even less complexity. The most significant continuity issue contemplated was the death of a shareholder. If one owner wanted to leave, the buyout, if any, would cost little. In fact, the most reasonable response might have been to liquidate the business. A comprehensive buy-sell agreement addressing all possible events that can trigger a sale and purchase of ownership was not only unnecessary, the legal fees to create such an agreement may have exceeded the value of your company!
But you, your business, and your co-owner(s) have likely changed mightily since those early days. Has your buy-sell agreement kept up?
This series of articles explores the reasons to review and to revise the buy-sell agreement, what events a buy-sell can and should cover and finally, how valuation can and should work in these agreements. So, take a look at a copy of your buy-sell agreement (it's probably where you keep those other "important" documents - in the bottom drawer of your desk), and ask yourself a few questions:
1. When was this document last reviewed? If the answer is
never or more than two years ago, it needs to be reviewed
now. In the early years of the business it probably wasn't
vital to review the buy-sell every year or so because
business conditions and value and shareholders
aspirations (both personal and business) didn't change
significantly. But today, change is the norm:
- business value may increase or decrease more in one year than the otal business value of your company in its start up years;
- owners inch closer to retirement or a desire to sell the company;
- or young co-owners who worked as a group during the early years now have different outlooks, different work ethics, and perhaps different health situation.
In short, your buy-sell agreement now needs to address all of the issues that could trigger a transfer of ownership. The next issue of this newsletter discusses seven trigger events successful owners should consider including in their buy-sell agreements.