Well-written Buy-Sell Agreements (BSA’s) enable orderly share transfers upon the occurrence of certain events during the life of a business. Buy-Sell Agreements also prevent litigation that can quickly create a lose-lose situation for business owners. This article presents a list of 27 trigger events and common issues to be addressed in Buy-Sell Agreements. And, just for fun, each item on the list begins with “D”.
Buy-sell issues are unpleasant to think about; which is why owners often put off addressing them and why we call them Dismal D’s. However, it’s only good business to put a plan in place that protects company and shareholder interests when these events occur. And they will occur.
Buy-Sell Agreement Dismal D List
- Departure (quits or leaves)
- Disinterest (mentally but not physically leaves)
- Discharge (fired)
- Deadlock (major disagreement)
- Distress (within the business)
- Default (personal bankruptcy)
- Disqualification (licensing, regulatory, etc.)
- Disclose (confidentiality)
- Donation (donate or gift stock)
- Do not compete
- Dual entities (e.g. holding and operating)
- Drag-along rights
- Distribution policy
- Dividends and Distributions after a trigger
- Dispute resolution
- Death benefits (life insurance)
- Down payment and debt (buyout financing)
- Determination of value (fixed price, formula, or independent valuation)
- Defining elements of any valuation engagement
- Discounts (for minority interests)
- Different discounts (depending on trigger type)
- Dueling appraisers
Items #1-14 are common trigger events. Items #15-27 are common issues to be negotiated and addressed in the BSA. Items #22-27 are nearest and dearest to our hearts as business valuation experts. Arguably, valuation is the most important (and argued over) aspect of buy-sell transactions.
The above list is essentially a checklist for consideration by shareholders when creating or reevaluating a Buy-Sell Agreement. Owners should work with their partners, corporate attorney, CPA and business appraiser to understand and address all of these issues. “Daunting D List” may be a better description!
Not only is it critical to have a BSA (yes, many businesses don’t have one), but it’s also vital that the BSA be kept up to date. Owners come and go. Shareholders’ personal, family and financial circumstances change over time. Likewise, businesses are not static and economic and industry conditions, services offered, customers, management depth competition are in a constant state of flux – all key factors in business valuation.
Business valuation plays a central role in buy-sell transactions and buy-sell agreements. Contact one of Exit Strategies’ senior advisors with any questions or for a no obligation, no cost and confidential consultation.