Buy-Sell Agreements

By Tom Taulli

When partners start a business, there is a considerable amount of optimism. Who wants to look at the worst-case scenarios? Hey, it might jinx the business, right? Well, in the business world, things can ó and often ó go wrong. A partner may be disabled or even die. Or, a partner may have an epiphany and decide to do something else.

The problem: small businesses can be devastated by changes in ownership. But, there is something that can be done: drafting a buy-sell agreement.

Basics

A buy-sell agreement is a binding contract between the co-owners of a business. The contract is enforced when a certain event occurs ó usually the voluntary withdrawal or death of a co-owner. The contract specifies how the ownership interest is handled.

A major concern is: will the ownership wind up in the hands of a competitor or a new owner that is disruptive or clueless?

With a buy-sell agreement, there is a clearly set of requirements for handling the transfer of interests of a co-owner. For example, the remaining shareholders may have a "right of first refusal" to purchase the shares. Or they may even be required to purchase the shares. In fact, the corporation can also be a buyer of the shares (known as a redemption).

What price? Good question. Valuation is an elusive thing. It can be specified via formula in the contract, say, a multiple of EBITDA or even just book value. Another approach is to hire an independent valuation expert.

And how will the buyout be funded? In some cases, the remaining shareholders may have to use personal funds. Although, it may be possible to set-up an insurance policy to fund the buyout.

Conclusion

These are some of the key questions. As with anything of this nature, a buy-sell agreement takes time and the advice of counsel. It should not be left to chance. More importantly, a buy-sell agreement should be drafted in the early stages of a company's formation. This is when the partners are the most amenable. Waiting until something bad happens often means turmoil for the company and the remaining shareholders.

MergerPlace is pleased to have the esteemed Mr. Tom Taulli as the managing editor of our MergerPlace M & A Advisor™ E-zine.

Tom Taulli is an expert in the M&A process. He is the author of the critically acclaimed The Complete M&A Handbook (Random House) as well as six other books written for publishers such as Bloomberg and McGraw-Hill. Tom also teaches M&A at the USC School of Business.

Tom has been quoted extensively in the press, including the Wall Street Journal, USA Today, Barron's, and The Los Angeles Times, and has provided commentary on CNBC, CNN, and Bloomberg TV, as well as appeared on a variety of top radio stations across the country.

Tom's books are available for purchase in our bookstore.

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