Strengthening Buy-Sell Agreements from a Business & Valuation Perspective

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 [...]

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 [...]

Multiple appraiser agreements call for the selection of two or more appraisers to engage in a process that will develop one, two, or three appraisals whose conclusions form the basis for the final prices. If this sounds like it might be time consuming, cumbersome, and expensive, it is. Such processes can also be divisive and foster litigation.

Rights of first refusal are not the same as buy-sell agreements. They may seem to operate like a buy-sell agreement, in that they provide procedures related to possible future stock transactions. But ROFRs do not assure that transactions will occur.

This article is a warning against the blind use of legal forms, or templates, for developing buy-sell agreements. Parties to each and every buy-sell agreement need to take time to agree on the key business and valuation aspects of their agreements, then have a qualified attorney (who can also be involved in reaching agreement) draw up the document.

If you know you will be a buyer, you will prefer to buy at the lowest possible price. If you know you will be a seller, you will prefer to sell at the highest possible price. If you don’t know which you will be (and you likely do not) and you act rationally, you will desire pricing in the buy-sell agreement that is reasonable regardless of future outcomes.

In composing this post, I’ve reflected about the many buy-sell agreements I’ve reviewed in recent years. From the list, let’s focus on four that have issues with either what appraisers call the level of value or with appraiser qualifications.

More than a decade ago, three friends got together to start a company. They invested money and time into the start-up and got it going. Early on, they had a buy-sell agreement prepared.
Fast forward to late 2006. My friend was called in to discuss the prospects for selling the company. As part of his engagement, [...]