What you don’t know CAN hurt you!
In a prior article, we’ve commented on the frequency with which Estate Plans are out of date, or simply never completed – 70% by some estimates! As surprising as this figure might be with Wills or Trusts, our observation over the years is that, if estate planning languishes to this degree, the statistics on business’s buy/sell agreements are at least this bad. Whether contained in an actual buy/sell agreement, or in a company’s Shareholder Agreement, Operating Agreement or other, similar documents (if such have even been prepared!), problems lurk for owners who neglect them.
What are the potential problems? We would put them in the following four categories:
If your company has two or more owners, you simply must document your understandings and expectations about departing equity holders in the business. Whether due to death, disability, resignation, or even wrongdoing, the terms on which you will settle any rights must be spelled out. This requires a look into the “scenario crystal ball” to determine everyone’s wishes on how to manage what may come. You don’t want to await the event to figure this one out. Do you have your terms settled?
Having a Stale One
High marks for you if you took the time to put an agreement in place. The potential issue: putting a buy/sell together is a process not an event. Circumstances change. Valuations shift. Expectations emerge. Economic conditions move. For these and many other reasons, you have to take a fresh look at your agreements from time-to-time. We’d suggest you freshen up existing agreements every three – five years, and have your business counsel monitor the process so you are reminded to do so. When was the last time you took a look at your agreement?
Having an Unfunded One
Most buy/sell agreements cover surviving owners’ obligations when one partner dies (or is disabled). However, if you run the numbers, you may get a surprise: the company and its remaining ownership can’t service the payment required. When that situation arises, it’s not all bad. Discerning this will lead you to manage the risk by use of a combination of insurance and deferred payment strategies so the business can support the payout. Have you done the math, and bought or updated any insurance advisable or required?
Having an Incomplete One
The best, more “modern” buy/sell agreements cover buyout issues well, but also add needed terms on a variety of other issues a good agreement should cover, such as ownership of intellectual property rights, and e-assets (see Jeff Kreye’s April 16, 2013 resource on this), non-competition and confidentiality restrictions, alternative dispute resolution, governance, employment terms (and complementary agreements on those), and several other points. Regular review will permit your documents to meet emerging concerns owners have to address. Does your current agreement address more than just buyout terms?
This is simply a summary of some of the buy/sell issues you must stay ahead of in today’s marketplace—each agreement must be custom-tailored to you and your business while addressing (or at least considering) what we’ve mentioned above. Please feel free to call on us to assist you with an evaluation and update of your buy/sell agreement; even if nothing is needed you’ll have the peace of mind to know all is well, and establish a regular cycle of reviewing an essential business planning document.