After reviewing your company’s buy-sell agreement you should probably be able to identify what parties are included.  If not, or if additional key parties need to be added, you should take steps to amend the buy-sell agreement.  Why are the parties so important?  Mainly because the parties will often have competing interests.  Especially given the individual characteristics of the owners. 

A buy-sell agreement is a contract that creates a buyer and a seller for the company’s shares or units.  Often, you won’t know until an event occurs if you are the buyer or seller.  It is axiomatic that the seller will prefer a higher price for their respective ownership and a buyer will prefer a lower price for their respective ownership.  This inevitably leads to tension and conflict if not addressed appropriately in the buy-sell agreement. 

Here are some additional factors that can lead to tough outcomes:

• Different levels of ownership (for example one 60% majority owner and two 20% minority owners);

• Different ages of the owners;

• Some owners may be in a better financial position (i.e. wealthier) than others;

• Some of the owners may be family members;

• One owner may have health concerns; and

• Some owners are more actively engaged in the business while some have “checked out.”

What is important to keep in mind is that the owners will likely have different individual characteristics and tensions will inevitably surface. It is critical to identify these items early on, have tough conversations if necessary and fully understand how the buy-sell agreement functions from a valuation perspective.

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.