A buy-sell agreement is critically important for businesses with more than one owner. It protects the owners and the business when expected and unexpected changes occur. When creating or updating your business valuation, be sure to include a process for valuing your business.
Emotions can cloud perceptions
Emotions tend to run high and cloud perceptions when owners face a “triggering event” that activates the buy-sell agreement such as the death of an owner, the divorce of married owners, or an owner dispute.
Suddenly the departing owner (or his or her estate) is in the position of a seller who wants to maximize buyout proceeds. And the remaining owners become buyers trying to get the best value for the business and their financial interests. Add emotion and you could have a mess. A comprehensive buy-sell agreement, drafted and agreed upon in advance, takes away the guesswork and helps ensure that all parties are treated equitably.
It’s also important to update your buy-sell agreement regularly. Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.
What are our protocols?
At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:
• How “value” will be defined,
• Who will value the business,
• Whether valuation discounts will apply,
• Who will pay appraisal fees, and
• What the timeline will be for the valuation process.
It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.
Are we ready?
Business owners tend to put planning issues on the back burner while they deal with day-to-day obligations — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout issues when they arise. Ciuni & Panichi, Inc. has been helping businesses succeed from start up to succession planning for more than 45 years. If we can help your business succeed, contact Dan Hout-Reilly, CPA, CVA, Audit and Accounting Services Senior Manager at DHout-Reilly@cp-advisors.com or 216-831-7171.
© 2018
