Don’t just rely on a generic form when putting together a buy-sell agreement, have a business continuity plan in place. Many of our clients are business owners and have a “partnership” with other individuals. We use the term “partnership” generally, and are referring to corporations, limited liability companies, and general partnerships. Partners in these types of business entities must consider constructing a buy-sell agreement.
It is important to understand what will happen when partners’ buy-sell agreements are triggered by the quitting, firing, retiring, death, disability, divorce, etc. of a partner.
Too many buy-sell agreements we’ve seen are simply all-purpose form templates which do not provide for any reasonable approach to how the partners will ascertain the value of a business for buyout purposes. There are a number of approaches that may be taken in a buy-sell agreement for valuation. One approach we often see requires the partners to periodically agree on value. In our experience, partners almost never do this. This leaves a terrible void when there is a triggering event with no valuation provided.
A second approach is the fair market value as determined in the sole discretion of the company’s certified public accountant. While in principle this may be reasonable, it is our experience that many certified public accountants do not have any real business appraisal background or experience. There are simply too many issues involved that fall into the arena of an experienced business appraiser, such as applying valuation discounts for minority interests or marketability.
There is no substitute for partners sitting down in an organized fashion and working out business and valuation decisions together. It is very unwise to use a template that may be found on the Internet or one that is simply a fill-in-the-blank form. The approach to valuation is critical in order for a buy-sell agreement to work. There are many other aspects to consider not covered here; for example, the use of insurance to fund the buy-sell agreement and methods of triggering a buy-sell. Now would be a good time to convene a meeting of business partners to consider revising any existing buy-sell agreements and to create a business continuity plan.