By: Patrick Ungashick

Your company’s buy-sell agreement may be one of the most important legal documents in your life. It may not seem or feel that way most of the time, but if and when you need that agreement, it can either save you huge sums of money and incalculable stress and suffering, or it can cause you to lose huge sums of money and suffer incalculable stress. The outcome depends on whether or not your buy-sell agreement is well designed, or not. And, unfortunately many buy-sell agreements make one or more of several surprisingly common mistakes.

Quickly – What is a Buy-Sell Agreement

Buy-sell agreements (also commonly called shareholder agreements or member interest agreements) are legal documents that identify situations where ownership in the company may change hands, and then provide instructions on how to handle each case. The most familiar example is what happens upon the death of a partner. A buy-sell agreement usually requires the deceased owner’s heirs to sell the interest back to the company or the surviving owner(s) and at a specified price. This provision protects everybody: the deceased owner’s heirs receive a cash payout while the remaining owner(s) move forward without unwanted business partners. Most buy-sell agreements have provisions to address a shareholder’s death or other triggering events, such as retirement or severe disability.

Mistake #1 – Not Address the Sale of the Company

The first common mistake deals with a triggering event that many buy-sell agreements do not address—the sale of the company. If you wish to exit by way of sale, but one or more of your co-owners don’t want to sell, typically you cannot make them sell their portion of your company if your buy-sell agreement does not directly address this scenario. So, if a co-owner does not want to sell, then you might not be able to sell either. Most buyers will not want to acquire less than 100% of a company, particularly, when one of the owners was already opposed to the deal.

This reality often comes as an unwelcome surprise to owners seeking to exit. Some owners only learn their partners can block a sale when a potential buyer is standing in the doorway, and they discover that the buy-sell agreement does not address a sale. This omission leaves business co-owners at risk. To fill in the gaps, be sure your agreement includes “drag-along” and “tag-along” rights. These odd-sounding provisions bind co-owners together when selling the business to an outside buyer. The “drag-along” part requires that if a majority of the owner(s) decide to sell the company, all of the other owners are required to join the deal. This clause protects majority co-owners against minority co-owners holding up a sale. “Tag-along” is the reverse—majority co-owner(s) cannot sell their interest without tagging along and including the minority owners at the same price and terms. This stipulation protects minority co-owners from being left out of any deal. Together, these provisions bind all the co-owners into a single block and restore the majority owner’s control over the decision to sell the entire business.

If you wait until a buyer is standing in your doorway to address this, you run the serious risk of undermining or killing your deal.

Mistake #2 – Inadequate Valuation Method

The second common mistake is the buy-sell agreement uses a valuation method that produces an undesirable outcome or price, or both. Every buy-sell agreement will have some provision for determining the value of the company (or a partial interest in the company) upon a triggering event. There are several commonly used methods, with the three most common being:

• Defining a fixed price (“The company is worth $10 million”)
• Setting a formula (“The company is worth five times EBITDA”)
• Calling for and performing a formal business validation upon a triggering event

It is possible to define reasonable scenarios where any of these methods would be a good or a poor fit to accomplish what the business owners need. So, while some professional advisors will clearly advocate one approach over another, each method offers significant advantages and disadvantages, so there is no one-size-fits-all answer to which valuation method should be used.

Instead, owners (and their advisors) must do two things on this issue, both of which commonly get overlooked. First, the different valuation methods need to be discussed and carefully weighed to determine which fits best for your situation. This analysis rarely gets done, which is both dangerous and unnecessary because the question typically only takes a little time to evaluate and answer.

Second, the valuation method selected today needs to be reviewed and updated over time. Frustratingly, that rarely happens. Few owners get excited about “reviewing and updating my buy-sell agreement” as a project or task, for understandable reasons. However, over time, the valuation method used in your buy-sell agreement likely gets less and less current and relevant to meet your new reality. Then, one day, a triggering event occurs. At that point, it’s too late to make a change, and the obsolete valuation method or price can do more harm than good.

Mistake #3 – Bad Form

Exactly how does the buy-sell agreement work upon a triggering event is crucial, and there are different forms of agreements. For example, assume one owner dies. The buy-sell agreement calls for the deceased owner’s heirs or estate to sell that interest in the company, as you would expect. However, how will that purchase occur? For example, does the company purchase the deceased owner’s interest? Or, do the remaining owner(s) acquire the interest? Or can they split it? The buy-sell agreement’s form will answer this question, and the question typically has significant financial and tax considerations.

The different types of buy-sell forms typically include:

• Entity purchase (the company buys back the stock or units)
• Cross purchase (the remaining owners buy the stock or units)
• Wait-and-see (a combination of the two)

While there are exceptions, in most situations, a wait-and-see method offers the most advantages with few if any disadvantages. Ironically it seems to be the least commonly used form in our experiences. Under this method, the legal agreement does not predetermine who or what will be the buyer—the agreement will “wait and see.” The legal document usually accomplishes this by giving the business the first option to purchase the interest within a narrow window of time, such as thirty days. If this time period expires with no purchase, then the option shifts to specified individuals (such as remaining owners) to make the purchase. If these individuals do not purchase the interest within the second time period, then usually the agreement concludes that the third and final step is the business must purchase the interest. The wait-and-see sequence (easy to remember as Business-Owners-Business or BOB) gives owners and advisors flexibility to determine the best course of action upon a triggering event.

Avoiding Oops

Buy-sell agreements are critically important documents that, when triggered, can either cause a disaster or rescue you from one. You cannot afford to wait until a triggering event occurs, to discover that the agreement is lacking in some way.

If you have questions about your agreement, contact us for a complimentary and confidential consultation to discuss or review your existing agreement. Better to know about and fix a small oops now.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

By: Patrick Ungashick

“Unlike a marriage, business partnerships are supposed to end.” Attorney William Piercy offers this insight in the opening chapter of his book Life’s Too Short for a Bad Business Partner. Piercy, with the law firm Berman Fink Van Horn in Atlanta, Georgia, is a specialist in resolving and dissolving unwanted business partnerships—an area sometimes called “corporate divorce.” Many business owners have unspoken expectations that their relationship with their business partner(s) will last forever when, in reality, those affiliations are not intended to be perpetual. All business partnerships should one day end, hopefully with a successful exit featuring the “partners departing as friends with full bank accounts” as Piercy observes. In the real world, this does not always occur. Many business partnerships fail, some quickly and others after an otherwise long and successful collaboration.

In his book, Piercy identifies ten reasons partnerships can fail. Knowing these can help you avoid a breakdown in your business relationship, or perhaps recognize that it may be time for your partnerectomy. Listed below are Piercy’s ten reasons, along with some of our experiences that corroborate the author’s observations.

One: Lack of Communication

“When dialogue breaks down, bad things happen,” Piercy writes. Communication breakdowns among business partners are, unfortunately common. One contributing factor is that many co-owners do not consistently allocate time to meet and address ownership issues—shareholder-only meetings are held sporadically or never at all. This bad habit inevitably leads to communication breakdowns.

Two: Lack of Transparency

In healthy business partnerships, there must be a division of labor, which usually means that some partners have a more regular need than other partners to interact with data like, financial records and reports. This may be necessary for day-to-day operations, but all owners must have consistent and unrestricted access to important company operational and financial performance data. When this is not the case, that is when partnerships can get into trouble as accountability, communication, and trust erode.

Three: No Shared Vision

If the business partners are not all rowing the boat in the same direction, Piercy forecasts, “rough seas are ahead.” After many years of close alignment, different business partners may develop diverging plans and aspirations for where to take the company. Exacerbating this, many companies operate with only loosely defined, unwritten strategic business plans. Without a shared, formal business plan with clearly defined goals and tactics, each owner is free to row the boat in whatever direction he or she feels best.

Four: No Clear/Defined Roles

Piercy notes that in a “startup culture…founders roll up their sleeves and do whatever needs to be done”. However, with time and company growth, owners need to divide and specialize their roles in the organization. Sometimes this occurs smoothly, but within some teams, it leads to overlap or gaps. When partners allow themselves to work in the company without written job descriptions governing their roles and responsibilities, this issue is more likely to occur.

Five: Failure to Stay in Your Lane

Even if each partner’s roles have been defined, sometimes a partner strays and engages in behavior that disrupts other people or processes in the company. When this occurs, typically the offending owner is acting with good intentions, but the disruptive behavior often goes unchecked because it’s hard for any organization to tell one of its owners to “stay in your lane.” Regardless, if this continues the partnership and business can suffer.

Six: Disparity in Contribution

When one partner is contributing (or perceived to be contributing) less to the organization: less time, effort, money, results, etc., the seeds are planted for dissent within the relationship. This awareness can be a natural progression within many partnerships. If one partner is significantly older than other(s), his or her energy and engagement may wane earlier than the other’s. If this situation deepens and the partners fail to address it, a complete breakdown may occur.

Seven: The Business Outgrows Its Founders

Piercy points out that starting a business and leading a business demand a different set of skills. Many founders struggle with recognizing the transition and making it. If one co-founder is not effective at leading a maturing organization, it can stress the relationship and the company. Small to mid-sized organizations that emphasize an inclusive culture can struggle with how to handle employees who were once effective but have failed to keep up with the company’s growth; the issue is even more challenging when the no-longer-qualified person is not just an employee but also an owner.

Eight: Failure to Hire Professional Help

“Without outside help,” Piercy writes, “entrepreneurs find themselves dealing with issues well outside their skill sets. Balls get dropped. Fingers are pointed. Relationships fray.” Some owners never fully recognize the need to hire professional management and engage expert advisors. Other owners see this need but then struggle with finding, hiring, and leading those people. Failing to field a competent team not only hinders sustained business growth, but it also endangers the partnership.

Nine: The Kids Don’t Want to Work in the Business

Within family-owned and led companies, lack of interest, engagement, or alignment can undermine business partnerships regardless of how strong the family bonds may be.

In addition to Piercy’s valid point, we, in exit planning, see additional reasons family issues can undermine business partner relations. For example, if one partner has family who works in the company, but another partner does not, the partners may find themselves advocating different exit strategies. The partner with children in the company wants the company to go to his or her kids, whereas the partner without children in the company wants to sell to an outside buyer. These seemingly incompatible exit goals can erode partner relations without a plan on how to accommodate everybody’s desired goals.

Ten: One Partner Has Baggage

“If your partner has more issues than National Geographic, it may be time to cancel the subscription,” writes Piercy. The experienced lawyer also notes that while it is noble to support a partner who is experiencing serious personal matters, everybody must protect the company and not let personal baggage bring down the partnership or the entire organization.

We once worked with a $100 million company where one of the owners had a severe alcohol problem. For years his partners bent over backward to support this person, including covering for their partner during extended absences during periods of treatment, and relapse. However, their tolerance reached its end when the partner drunkenly confronted a client. After this, the other partners regretfully knew they had to pursue a corporate divorce.

How to Avoid a Corporate Divorce, or What to Do If You Need One

While Life is Too Short for a Bad Business Partner is essential reading for the business co-owner who recognizes that he or she must get a corporate divorce, all business partners should read this concise book. It will not only guide an owner through the operational, legal, and financial steps of a partnership dissolution, but Piercy’s book too can help all partners implement sound business practices and take corrective action within a struggling partnership before it is too late.

Click here to register for an upcoming webinar interviewing Bill Piercy about this topic.

To secure your copy of his book, visit Amazon.

If you have a quick question coming out of this article or, if you want to discuss your situation in more detail, we can set up a confidential and complimentary phone consultation at your convenience contact Tim 772-221-4499.

We believe business owners deserve to exit happily. After all, what is the purpose of working as hard as you do if you never manage to reach your business and personal goals at exit?

Exit impacts nearly every area of a business owner’s life. Failing to exit happily one day could ruin a lifetime of dedicated work and sacrifice. Therefore, it helps to know the most common reasons why owners fall short of exit happiness.

Let’s call these the Happiness Killers, and these are the 13 Happiness Killers you should know about.

1. Failing to reach financial freedom. It’s not enough to exit the company and sell for a good price or maximize value. The more important question is, are you financially free after exit? If you exit but come up short of financial freedom, you may find yourself regretting having exited at all.

2. Getting too little cash at closing. It’s natural to fixate on the total price you expect to receive when selling the company. However, just as important as total price is how much cash you get at closing. Any dollars that you do not receive at closing are dollars you might never see. If you never receive those dollars, you could end up exiting unhappily.

3. Working with (or for) people you don’t like or respect. Many owners keep working after exit with (or for) the company’s new owners/leaders. If you later learn that you do not like or respect these people, you may find yourself deeply unhappy. This is especially true if you did not reach financial freedom (see #1) and therefore cannot afford to just walk away from the situation.

4. Doing something that you don’t love. It does not matter how much money you have in the bank if you wake up every day facing doing something that you do not enjoy. As with the previous Happiness Killer, this can undermine your personal happiness regardless of how financially successful your exit may be.

5. Not knowing what you are going to do in life after exit. After exit, most owners search for something to do that provides the stimulating challenges and sense of identity that they enjoyed from running their companies. If you never find this, you may struggle to be happy after exit.

6. Feeling like your top people were mistreated. Your business’s value is undoubtedly rooted in its people. You likely will not be happy if your exit causes your people to unfairly lose their jobs or if it strands former employees in an inferior work environment.

7. Feeling like your customers are getting less value. An exit that significantly diminishes the quality of goods or services you had been providing customers is not a happy exit.

8. The exit breaks up relations between business partners. If you have business partners, you will probably care deeply about how they fare during your exit – and theirs. There are many ways that one partner’s exit can undermine another partner’s goals or plans. Partners who lack alignment regarding these issues often end up exiting unhappily.

9. Leaving before you wish to. Leaving your company before you want or intend is a Happiness Killer. You will likely feel as though somebody ripped your company away from you.

10. Sticking around longer than you want to. The opposite side of this issue is having to stay with the company any longer than you prefer after your exit. If you have other things you’d rather do and pursue, then being forced to stick around with the company will not be a happy exit.

11. Exit causing stress at home/in marriage. Exit brings massive change in an owner’s personal life and relationships, especially with your spouse or significant other. Many couples are caught off guard and find themselves disoriented in the post-exit world. Left unchecked, this can lead to regret and unhappiness.

12. Not leaving the company in good hands. If you exit the business only to realize later that the company’s new leaders are not competent to run the company and/or not equally committed to its success as you were, you may find yourself unhappy long after your exit.

13. Paying more taxes than you could have. Your exit will probably be the most expensive transaction in your life, with taxes comprising the largest line item costs in most situations. An excessive tax bill can undermine not only your nest egg but also your sense of fairness and satisfaction.

With so many exit Happiness Killers out there, it’s prudent and wise to evaluate which of these potential threats you have adequately addressed and which may still be in your future. Ask us how to do this. You are working too hard and have made too many sacrifices not to be sure that you are on the path to future exit happiness.

Download the eBook now.

Schedule a 45-minute consultation to see how you can achieve a financially rewarding exit.

Contact Tim for a complimentary consultation: 772-221-4499 or email.