Strengthening Buy-Sell Agreements from a Business & Valuation Perspective

Chris Mercer’s newest book, Buy-Sell Agreements for Closely Held and Family Business Owners: How to Know Your Agreement Will Work Without Triggering It is set for publication August 1, 2010.

Buy-sell agreements are among the most common yet least understood business agreements and many are destined to fail to operate like the owners expect. Many, in fact, are ticking time bombs, just waiting for a trigger event to explode.

If you are a business owner or are an adviser to business owners, this book is designed for you. See what a few others are saying about the book.

A buy-sell agreement is one of the most critical agreements in any closely held business. It must be done right to avoid serious disputes among business owners when one of the owners dies, quits or is terminated, becomes disabled or divorced, or gets into financial trouble. Chris Mercer does a masterful job, in Buy-Sell Agreements for Closely Held and Family Business Owners, of discussing the key issues in a thoughtful and easy-to-read manner. With more than 30 years of expertise in the field, Chris explains why the failure to have a solid buy-sell agreement may be devastating to a business and its owners, and provides very practical tips on how you can greatly improve your buy-sell agreement.

Nathaniel L. Doliner
Shareholder, Carlton Fields, P.A.
Tampa, Florida Office

For shareholders of closely held businesses, this book presents a comprehensive and understandable discussion of the essential elements of buy-sell agreements and how to correct deficiencies that commonly occur. We have followed the author’s very appropriate advice to “make sure you have an ironclad, foolproof system to keep the price current” by getting an annual appraisal.

W. J. “Bill” Rankin, CPA
Chief Financial Officer, Blue Bell Creameries, L.P.

The biggest problem with a shareholder’s agreement is they’re never looked at once they’re signed. Based on today’s circumstances will it act the way you expected? Most don’t. Chris Mercers book will give you big picture ideas without legal mumbo jumbo

Larry H. Colin
Author/Producer
FAMILY, Inc.

As a lawyer who works mostly with closely held and family-owned businesses, I’ve seen many buy-sell agreements, and I’ve drafted my share of them. I can say unequivocally that this is the most useful analysis of the subject I’ve encountered. The book is relatively compact, but it’s not in the least superficial or truncated. On the contrary, Chris Mercer has produced a uniquely practical handbook for business owners and their advisers which is thorough and comprehensive, but at the same time is clear, straightforward and understandable. In direct and non-technical terms, Mercer thoughtfully explores the pros and cons of competing approaches, and unflinchingly expresses his specific recommendations. Anyone who owns or advises a privately owned business needs to read this book.

Jared Kaplan
Senior Counsel, McDermott Will & Emery, Chicago

This is the business owner’s self-defense manual. Reading it could be the most cost-effective hour or two you’ve every invested. Don’t dare sign a buy-sell agreement until you’ve read and pondered the questions posed in this book. Your life(‘s work) may depend on it!

Stephan R. Leimberg
CEO and Publisher, Leimberg Information Services, Inc. (LISI)

To reserve your copy of this new book with no obligation, click here. We will contact you when the book is available. Single copies of the book will sell for $29.95 each, and quantity discounts will be available. For a short video about the book from Chris, click here.

A few months ago, I read a buy-sell agreement for a company.  There were two owners, with one holding 60% of the stock and the other holding 40%.  The agreement provided, among other things, that the death of either owner would trigger the buy-sell agreement, enabling the company to acquire the shares of the deceased owner.

The agreement called for two mechanisms to determine the purchase price:

• If the company and the estate of a deceased owner could reach agreement on the purchase price, then that price was to be determinative. I have cautioned against this kind of pricing mechanism on many occasions.  At the time of death of a shareholder, the interests of the estate and the company (in this case, the remaining owner) diverge.  It is difficult to reach agreement under such circumstances, and often, the process of arguing creates hard feelings.
• If no agreement is reached, then the parties will agree on an appraiser. This option would come into play only if there was disagreement over value.  The agreement called for the parties to agree on a “qualified expert” who would be asked to determine “the value” of the shares.

A couple of observations are in order:

• There was no definition of “qualified expert.”  Absent any prior discussion between the parties, there is certainly room for disagreement over what constitutes a qualified expert.  Presumably, the expert would be a business appraisal expert, but that is not stated in the agreement.

• The agreement was silent regarding the kind, or level of value, that the appraiser should determine.  One owner holds a controlling interest in the company and the other holds a minority interest.  Should the appraiser provide the same kind of value if the controlling owner dies as if the minority owner dies?  The parties probably don’t want an appraiser making that decision.  I, as an appraiser, would prefer not to have to make it for them if I was ever retained to provide an appraisal for purposes of that agreement.

I could comment further, but the point is made.  The language in this buy-sell agreement does not adequately specify what the qualifications of an appraiser should be.  It also does not specify the kind, or level, of value that the appraiser should determine.  If this agreement is triggered, there is a high probability of disagreement on multiple levels.

My new book, which will be available August 1st, is titled Buy-Sell Agreements for Closely Held and Family Business Owners: How to Know Yours Will Work Without Triggering It. Send me an email if you’d like to be added to the list to receive a copy when they become available ($29.95) or click here for more information.

If you have business owner clients, you will definitely want to obtain and read this book, and likely share it with many of your clients.  Quantity discounts will be available.

Until yesterday my new book, Buy-Sell Agreements for Closely Held and Family Business Owners: How to Know Your Agreement Will Work Without Triggering It, has had the benefit of my personal editing and the help of a few friends.  Yesterday, we sent the manuscript to a professional editor who, hopefully, will work miracles with anything I’ve missed or otherwise messed up!

The plan is to have books available by August 1st.

The manuscript has just shy of 60,000 words and is written in a less formal and more accessible style than anything I’ve ever written.  It should run to about 200 pages in the expected 6 X 9 format.  My last book on buy-sell agreements, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions?, was 330 pages in length and was written in a more technical style.  Its target market is business appraisers and attorneys.

The target market for Buy-Sell Agreements for Closely Held and Family Business Owners: How to Know Your Agreement Will Work Without Triggering It is, as the title suggests, business owners.  If you are a business owner, or if you advise business owners, this book is for you.

The new book introduces a conversation between Pete (that was my father’s nickname for me) and Sam.  Sam is the 40% owner of a successful but completely fictitious business.

Pete: “Sam, I just buried a small bomb in your yard.  It isn’t large enough to kill you, your wife, or another member of your family, but it would certainly maim you or them if one of you stepped on it.”

Sam: “Where is it?”

Pete: “I’m not going to tell you where it is.  But don’t worry.  Chances are, it is so well- hidden that no one will ever step on it.”

Sam: “What do you mean, ‘chances are’?  That’s a chance I can’t take!  If it were just me it would be one thing, but you’re talking about hurting my wife and family!”

Pete: “Like I say, don’t worry.  Maybe no one will ever step on it.  Maybe it will never explode.”

Sam: “You must be crazy!  I’ll bring in a bomb squad and dig up the entire yard to get rid of that bomb!”

Pete: “Now Sam, you know I’m just kidding about the bomb, but I do think that it is very important that we talk about your company’s buy-sell agreement a bit.  How about dinner tomorrow night?”

Sam: “Sounds good to me.  See you then.”

The conversation continues at the beginning of the first eighteen chapters during which Sam learns more than he thought there was to know about his company’s buy-sell agreement.  It is truly a ticking time bomb!  Importantly, he also learns what he and his fellow owners have to do to fix the agreement without triggering it.

The next five chapters provide detail for the basic requirements to specify a valuation process for a buy-sell agreement.  Business owners can certainly read these chapters, but they will be of particular interest to advisers, as well.

The book recommends that the best valuation process for most successful companies is what is termed a Single Appraiser – Select Now and Value Now (and regularly thereafter) process.

Chapter 24, the final chapter, is entitled “Process-Busting Valuation Issues.”  If you aren’t completely convinced that the Single Appraiser – Select Now and Value Now process is best for your buy-sell agreement after reading Chapters 1-23, this last chapter should do the trick.  This type of valuation process is the only way you can be sure to avoid the potential bombshell blast when your agreement is triggered and different appraisers take different positions on one or more “process-busting” issues.

We’ll keep you posted as the book progresses and becomes available.  We are on a fast track to have it available for you.  Here’s is what one early reader, a nationally known attorney who works primarily with owners of closely held and family businesses, says:

As a lawyer who works mostly with closely held and family-owned businesses, I’ve seen many buy-sell agreements, and I’ve drafted my share of them.  I can say unequivocally that this is the most useful analysis of the subject I’ve encountered.  The book is relatively compact, but it’s not in the least superficial or truncated.  On the contrary, Chris Mercer has produced a uniquely practical handbook for business owners and their advisers which is thorough and comprehensive, but at the same time is clear, straightforward, and understandable.  In direct and non-technical terms, Mercer thoughtfully explores the pros and cons of competing approaches, and unflinchingly expresses his specific recommendations.  Anyone who owns or advises a privately owned business needs to read this book.

Jared Kaplan  — Senior Counsel, McDermott Will & Emery, Chicago

This post is written specifically for my session on LinkedIn, which I’ll be giving the afternoon of June 2, 2010 at 3:30pm EST at the Fountainbleau Resort for the 2010 NACVA/IBA Annual Consultant’s Conference.  There are worse places to be.  There are about 750 valuation-related consultants of many types agree and are here, as well.  This is quite a conference!

The LinkedIn session is based on a booklet I wrote last year, Professional Services Networking:: Your LinkedIn Primer. I wrote the primer because I wanted to capture as much of the learning curve in using LinkedIn as effectively as possible.

• If all goes well, this post will be shown on my Profile when I display it during the session.  This will show the integration of blogs, one form of social media, with LinkedIn, another.
• If all goes even better, I’ll show the integration of this blog with a new Facebook application, as well, to illustrate another way to disseminate content.

Now, this is a blog on buy-sell agreements, so I need to mention this very important topic.  I have a new book coming out August 1, 2010.  It is called Buy-Sell Agreements for Closely Held and Family Business Owners:: How to Know Your Agreement Will Work Without Triggering It. I’m really excited about this book.  It has a number of features that will be helpful for business owners and attendees at this conference as advisers to business owners.

• It is relatively short at just over 50,000 words.  What that means is that it is a fairly quick read.
• It is written in a fashion that discusses various aspects of buy-sell agreements, highlighting potential problems.  There are constant reminders to business owners to be sure that their buy-sell agreements will work.
• It is written to make a clear recommendation that most successful businesses should use what I call the Single Appraiser — Select Now and Value Now (and Thereafter) valuation process.  In other words, regular appraisal is the key to the successful operation of valuation processes for most buy-sell agreements.

If you’d like to sign up to receive your copy when they come out, send me an email at mercerc@mercercapital.com.  The books will cost $24.95 each.  We’ll send your copy as soon as they are available.

So now, this blog post has shown the integration of blogging with LinkedIn.  It has also shown that LinkedIn can be an extension of your brand if you have a blog.

If you don’t have a blog, we’ll talk about how LinkedIn will nevertheless help you in many ways as you continue your efforts to integrate social networking with the regular cocktail party and breakfast/lunch and calling varieties.

By the way, if you want a complimentary copy of Professional Services Networking::Your LinkedIn Primer, click here or email me at mercerc@mercercapital.com.

According to a recent story in USA Today, prenuptial agreements (or “prenups”) may be unromantic, but they may well make sense.

Buy-sell agreements definitely make sense when companies have two or more owners, and virtually all substantial corporations have such agreements.

Prenups are the result of conversations between couples regarding what happens to whose assets and income in the event that the couple divorces.  They are increasingly being used when couples marry, particularly for the second (or third) time.

“More and more, these agreements are being drafted.  It’s not just for the rich and famous any longer.  It’s for people that have assets and/or income that they want to protect.”   Marlene Eskind Moses, President of the American Academy of Matrimonial Lawyers.

Buy-sell agreements are supposed to be the result of conversations among owners of businesses addressing what will happen when lots of “trigger events,” including divorce, occur.  The objectives of such agreements are to protect the interests of the company and the individual shareholders, consistent with mutual fairness.  Sometimes, however, the owners may not talk — or pay attention when others are talking — about important provisions.

I read a buy-sell agreement recently that addressed the divorce of owners.  It provided that, in the event that any owner was divorced, the company had the right to repurchase 100% of his shares.  Period.  That’s it.  Normally, divorce provisions in buy-sell agreements are there to prevent shares owned by a divorcing spouse from being split by divorce courts and awarded to non-owner-employee spouses.
Suppose that an owner of this company had a prenup agreement that protected his ownership interest from division in divorce.

Wouldn’t he be surprised when his fellow owners enforced the agreement and purchased his shares?  Suppose he did not have a prenup, and arranged things in the divorce to protect his interest in the company?  He’d still be surprised if the agreement was enforced.

I’m not saying this will happen, but it could.

My challenge to you is to be sure you know what your buy-sell agreement says in the event an owner is divorced.  How would the provisions apply if another owner (not you) got divorced?  How about you?  Are any prenup agreements coordinated with the operation of the buy-sell agreement?  These are good questions to consider.

AICPA/AAML National Conference on Divorce: The Premier Conference on Financial, Legal, and Tax Issues in Divorce

May 6-7, 2010 » Bellagio » Las Vegas, Nevada

Jointly sponsored by the AICPA and the AAML (American Academy of Matrimonial Lawyers), this conference provides technical (tax, valuation, litigation, etc.) and practice management skills in the field of divorce services.

On Friday, May 7, 2010, Chris Mercer, founder and CEO, will present two sessions:  “Attorney Tricks/Witness Traps: The Litigation Wars,” with Jeffrey Brend, JD, CPA/ABV, ASA, CFE, AAML, and “Subsequent Events After the Valuation Date.”

Learn more and register on the AICPA’s conference website.

Chris Mercer will be a featured speaker at the upcoming Southern Regional Meeting of the American College of Trust and Estate Counsel (ACTEC) on Saturday, April 17th in Knoxville, Tennessee. Mercer will speak on the subject of buy-sell agreements, sharing the knowledge and wisdom gained by working on buy-sell engagements gone bad as the valuation expert.

Chris’ session will address:

• Identifying areas of concern or confusion after a cursory review of your buy-sell agreement
• Understanding the pitfalls inherent in formula and fixed-price agreements and know what you can do to fix them
• The six defining valuation elements that must be present in every process agreement. Without any of these elements, your agreement is potentially headed for trouble
• Discovering the solution to the uncertainties in your agreement

The American College of Trust and Estate Counsel (ACTEC) is a nonprofit association of lawyers established in 1949. Its members are elected to the College by demonstrating the highest level of integrity, commitment to the profession, competence and experience as trust and estate counselors.

Click here to download a complimentary copy of Chris Mercer’s buy-sell agreements presentation

We found this and thought it was fun.  Take a look at www.ihatemypartner.com.

If a buy-sell agreement is not clearly drafted, almost anything can happen.   In this North Carolina case, a father and two sons were in business.  The father died, and the two sons shared ownership of the business.  One of the brothers was getting a divorce and the parties were trying to figure out what would happen.  Then, the divorcing brother died.  What did the buy-sell agreement say?

The conclusion is found in the North Carolina Business Litigation Report.

The blog post concludes:

The Court held that the parties’ course of dealing established their clear intent that the policies in question be used to fund the buy-sell portion of the Agreement.  Kenneth’s widow argued that the technicality of policy ownership entitled her to both the policy proceeds and the shares in the corporation; instead, the trial court and the Court of Appeals held she was entitled to neither.

Read and heed.

On Friday, March 19, 2010, Chris Mercer was featured as a guest on the radio show “Business for Breakfast,” hosted by Tom Chenault on the Radio Colorado Network. During a 10-minute interview, Tom and Chris discussed various aspects of buy-sell agreements, including the hidden “time-bombs” that can be present in buy-sell agreements, the pitfalls of fixed and formula priced agreements, and the treatment of life insurance.

Use the player below to listen, or right-click the link below and select “save as” to download an .mp3 file of Chris’ interview.

Chris Mercer on Buy-Sell Agreements (right click to download)