Read Your Buy-Sell Agreement

If you have a buy-sell agreement my suggestion would be to pull the agreement from the file and read it in full today (if you don’t have a buy-sell agreement and are a partial owner in a privately held company my suggestion is to get one prepared by an experienced attorney).  Upon reading the agreement you should notice several key areas:

1.       Parties to the agreement - are there any new key owners that need to be considered? 

2.       Type of agreement - Cross-purchase? Company redemption? 

3.       Valuation -  Formula?  Appraisal process?  Agreement by the owners – if so when was the last time you agreed on a value?

4.       Buy-out process – notice, time frame, standard of value?   What happens with ownership, how do the proceeds flow, how is debt treated, how is cash treated?

5.       Funding – frequently by life insurance.  However, consider if the funding could alter the company valuation? 

6.       Definition of triggering events  – what types of events qualify? 

If you do not understand exactly what will happen to your ownership upon a triggering event, then I would recommend taking steps to fully understand the process, how the company will be valued and how any funds will be allocated as result. Planning now can ensure that you have a process everyone understands. Additionally, if changes need to be made to the buy-sell agreement, it becomes increasingly difficult AFTER a triggering event has occurred. If there are problems inherent in the structure it is much easier to make changes with owners (or heirs) that are getting along.