When Constructing Buy-Sell Agreements
This article is a stern warning against the blind using legal forms, or templates, for developing buy-sell agreements. Parties to every single and every buy-sell agreement have to do time to concur with the key business and valuation elements of their agreements, then possess a qualified attorney (who will also be included in reaching agreement) write up the document.
What may be simpler? All the parties should do is to acknowledge the events that “trigger” the buy-sell agreement, on who buys stock, additionally, on the pricing and terms in the purchase. Also, it can be helpful if your funding for your transaction is specified, likewise. The problem is, if my experience is any indication, this stuff are very rarely agreed to for the level at which it truly is necessary for that shareholders to be aware of what will happen when their buy-sell agreements are triggered with the quitting, firing, retiring, death, disability, divorce, etc. of your shareholder.
Keep under consideration that I am not only a lawyer and never draft buy-sell agreements. I am, however, an organization appraiser that has seen numerous buy-sell agreements within our normal valuation practice – weight loss program which after failed valuation processes when litigation has recently ensued. As such, I read and interpret buy-sell agreements from business and valuation perspectives from the normal duration of my business and I can tell that relatively number of them address the fundamental questions in unambiguous terms. Could this be because, partly, a lot of people rely upon standard forms as opposed to doing the sometimes difficult work of seated together to agree to the important thing business and valuation issues?
Over the 2009 New Year holidays, I did some fairly unscientific research. I Googled the terms “buy-sell agreements” and “buy-sell agreement forms.” In searching quite deep to the rankings, six forms were found which were available on-line and free. There are numerous sites that charge for buy-sell agreement forms, while others that claim to make available templates “for free,” but demand a “membership” gain access to them. At another time, I’ll set an allowance and go form-shopping to see in the event the results will vary. Of the six free templates found, I noted the subsequent:
A cross-purchase agreement.
One would have been a cross-purchase agreement template calling for every one of two shareholders to buy life insurance within the life of one other. They had to acknowledge value periodically. Did I say that shareholders rarely do this? There was few other pricing mechanism.
A (valuation) process agreement.
This template addressed only death and termination of employment and nothing else trigger events (e.g., divorce or disability). The pricing mechanism read as follows:
“Unless the parties accept to another price on paper, the cost of each share of capital stock will probably be equal to its fair market price as an ongoing business concern as determined from the sole discretion in the company’s Certified Public Accountant (CPA), etc determination will probably be binding and conclusive upon the parties hereto.”
“Fair cost” is mostly thought to be a definite term among business appraisers, but what in the event the company’s CPA will not be an appraiser? The definition above leaves offered to the sole discretion with the CPA, who might not be qualified being an appraiser, whether valuation discounts, for example minority interest or marketability discounts, is highly recommended and/or applied inside the determination of price. Would you want an unqualified CPA making such decisions? Would they want to make them?
This agreement also were built with a deadlock provision inside event which the parties could not agree with the company’s CPA. In that event, the shareholder’s estate along with the company would each opt for a CPA, the two of which would pick a third CPA. The price include the average on the three conclusions. Note that there’s no requirement that the opposite CPAs be business appraisers or have appraisal credentials.
It has not been clear whether the a life insurance policy the company might purchase (at its election) is highly recommended to be a corporate asset (and combined with value inside determination of price) or to be a funding mechanism only, and not combined with value. The CPA would, within his or her sole discretion, need to make that decision.
This agreement, if implemented, would have been a disaster waiting that occurs.
An identical form is discovered on another website.
A corporate buy-sell agreement.
This agreement template suggested either an agreed value, or even a formula value, but only blanks to the formula were provided. The most likely valuation mechanism was then defined:
“Purchase Price in Lieu of Establishment of Current Agreed Value. In the event the Shareholders tend not to establish an Agreed Value for over two (2) years before the Date of Death or Withdrawal or Date of Occurrence, then your Agreed Value will be calculated by a completely independent Certified Public Accountant acceptable with a majority from the shareholders. The accountant shall determine the fair cost of the Stock as on the Date of Death or Withdrawal or Date of Occurrence, as appropriate, by whatever means he deems appropriate. This fair monatary amount shall then get to be the Agreed Value. The accountant may apply whatever discounts he believes appropriate, including reductions in price for lack of marketability. The fees and expenses from the accountant should be paid from the Company.” (emphasis added)
Should the CPA have appraisal credentials? Is the appropriate “fair market price” that in the entire company or of the interest inside company at the mercy of the agreement? Note that a minority shareholder be subject to the agreement will often have no say whatsoever inside the selection in the CPA, considering that the selection will likely be determined by a majority with the shareholders by number. If you will find at least three shareholders, this could easily occur.