It’s important to understand that every Buy and Sell Agreement (BSA) is different and has a separate purpose when put together and implemented. Because of the vast differences in BSA’s, using a standard form of BSA rarely accomplishes the needs and wants of the parties involved.
Each participant in the agreement has different purposes and objectives and looks at the transactions very differently. Neither party knows when the agreement will actually be needed, and what the triggering event will be. A triggering event could be death, disability, divorce, termination, bankruptcy, and other defined events. One thing that can is consistent in most cases is that when a triggering event happens, then each party becomes visionless to the other parties’ best interests, and only focuses on their own and best interests.
The two participants in a BSA are a seller and a buyer. They come in different forms, as individuals, trusts, or estates. Usually their purposes and objectives are very different, and there usually is a conflict between the parties.
While creating the BSA the parties tend to be very fair before a triggering event. This is because everybody is in the same position and no one knows who will suffer the future triggering event. This is a positive viewpoint, as the parties are reasonable and objective about the possible and various scenarios. Everyone’s objectives are personal, and range from financial, tax, to personal protection for their families. Having a designed BSA can offer the owners some satisfaction that their needs are documented and witnessed.
Objectives of BSA
- To provide a predetermined roadmap for the business based on a triggering event which may call for the sale of a participant’s ownership interest.
- To provide a guaranteed buyer for the owner’s business interest and to create a market for that interest.
- If funded through life insurance or some other means, the BSA will provide liquidity for the payment of the business interest and help the estate pay for the estate taxes and other settlement costs of the deceased owner’s estate.
- Can avoid an impasse between the parties in the event of a triggering event.
- To protect the company and surviving shareholder from subsequent competition, should a terminated owner wish to sell to a 3rd
- To avoid potential conflicts between the surviving owners and the deceased owners’ heirs, by creating a roadmap through the agreement at the owner’s death.
- Can level the playing field for the estate or deceased owner’s as the agreement gives the deceased owner a say on how settlement of their interest will be to their heirs and estate. Especially, when the surviving family have little knowledge of the business entity.
- Establishing the price and method of valuing the interest, establishing the terms of payments, and providing a method of funding for the payment of that purchase price.
- Can create job stability for minority owners and key non-owner employees.
- Can establish the value of the entity for tax purposes.
- Can preclude owners from selling their interest without the consent of others thus avoiding the third-party ownership or voting percentages.
- The agreement can restrict ownership to people who are actively engaged with the entity of full-time basis.
- Can improve the credit worthiness of the entity.
- Can avoid transfer violations/Licensing requirements.
- Avoid transfers to individuals that would terminate the S corporation status.
- Can dictate discounts for lack of marketability (minority interest discounts).
- Can provide for voting agreements where necessary.
- Can dictate what happens to in force life insurance policies on the terminated or surviving owners.
These are only a few of the many reasons for a buy and sell agreement, and the advantages of funding the agreement.
In part-one of this article, I mentioned how purchasers will prefer to buy a business where everything looks good and there are no apparent problems. Smart and neat operations will attract serious buyers; however, this is only one part that is needed to achieve your selling objectives.
There should be no hidden problems or secrets which can jeopardize the purchase. Any undesirable factor not disclosed to the purchaser can lead to a non-sale, or at the very least, something they can use as a negotiating tool. The fact that a deal has fallen apart, is not only frustrating, but will cost you money, time, and distraction from your business.
An owner who unknowingly discloses secrets or situations in their business can end up becoming a deal breaker. Issues which are known need to be dealt with to have the best chance of a good sale. Since there may be issues which are unknown the best answer to this is to search for the problems in advance and take care of them. Think of this the same way you would treat the sale of your home. You would normally fix up, repaint, and clean up before you put the home on the market. You should do the same thing with your business.
Not only would you want your physical location to be clean and tidy, but this also flows over to the other parts of your business, such as accounting, financing, marketing material, department procedure manuals, and an array of other business items. Prepared written policies and procedures are a great selling point for a prospective buyer. Remember, when someone is interested in your business, it’s their team that inspects every aspect of your business in doing their due diligence. This is a micro inspection of all aspects of your business, so it will pay to make sure there isn’t a bunch of dirty secrets hanging around.
FIRST IMPRESSIONS AND PHYSICAL APPEAL
The first time a prospective buyer visits your company they make value judgements. They will observe everything from your reception area to your signage in and on the building. If the impression they get is positive, they will want to investigate your company more. You don’t want to lose their interest based on visual appeal of your business. No matter how good your business seems to do on paper, the prospective buyer may lose interest based on your first impressions.
This observation doesn’t end with just the building. Your premises, marketing literature, dress attire of you employees, uniforms, office settings, rubbish areas and a host of other areas should be updated and tidy. Continue reading “The Final Act! The Day Will Come! Part 2”
There are two areas small business owners have a concern in:
- When the business has no apparent successor to take over.
- Where the business owner has young children to succeed him, but they are too young to include in the planning at this point. This is a void period should the owner want to leave, become sick or die.
Succession and Exit planning can be the most difficult planning a business owner can accomplish. However, it is the most necessary planning a company can undertake to protect the value of its shareholders and their families over the long term. Succession planning concerns are often what keeps them up at night, giving them an uneasy feeling of a task not completed, the loose ends!
Succession planning is the natural outgrowth of strategic planning. In reviewing operational and financial goals, the need to ask a series of hard questions such as; Continue reading “Why You Must Concern Yourself With The Exit Of Your Business The Day You Start It! “
Business Succession planning for businesses, especially private companies, should be on the a top propriety in the planning area. Whether the sale will be to top management, middle management, family or to outside sales, it should be an ongoing planning concern.
A number of private established company’s do not have any such planning, and newer companies in where the owners have no family to take over have the same problem. In both situations there is a challenge to create a succession plan.
Business succession planning could be the hardest planning of all. However, it is a must in planning. It is the only way the current owners can guarantee that the wealth of the company will either be passed on and continued, or the wealth is transferred to the families through the sale of the business. Without the succession plan, the largest potential of business wealth can be lost forever.
The lack of a Succession planning is the reason why many stockholder owners walk the floors at 2am. They have a true concern for the successor of the firm and the protection of the wealth of the firm.
Some of the questions that the owners of firms have:
- What if I die or become very sick?
- What if I lose my key person or key group?
- What if don’t want to do this any longer?
- What if there is an economic downturn and I can’t recoup?
Other areas of concern are:
- If I want to sell, when do I sell?
- What is the business worth?
- Does the senior management want to leave and retire, or stay active?
- Can the main group of owners afford to retire without creating a cash flow crunch?
- How vulnerable is the company if key people leave and take the secrets with them, or even start their own business, using the company’s business model, or share vital business secrets?
The questions discussed above along with many other questions, are the basis of the planning and will help the planning team of advisors guide the owners through the maze of planning traps and opportunities as they walk the path together. Continue reading “Business Succession Planning Is A Necessity For Every Business! “
Because of the Tax Cut and Job Acts of 2017, the marginal rates are lower. The impact of the recent tax cut is very straight forward. Lowering the rate, means a higher after-tax cash flow which translates into higher value for businesses.
Business owners know their business better than anyone. That being said, you would also assume they would know the value of the businesses? Not so fast!
Knowing your business and knowing what you think it is worth in reality can be two separate issues. If it were that simple, appraisers would not be needed, but they are, and they play very key role. They arrive at a fair market value after taking many facts into consideration.
Valuations; “The Walk Way Number”
The “country club” concept of a business owner having a number in his/her head as to what they would take, if offered, offers some interesting conversations during happy hour!
Over the years I have spoken to business owners, and periodically I have been told that the owner has a figure in their head, and if they were offered that figure for their business, they would take it! They seem to know their business better than anyone, so it is reasonable to believe they have a handle on the value of their company. In more cases than not, that figure would allow the owner to go and do what they want in life as it would give them the capital needed, and the can walk away from the business.
However, there are some different sides to this concept! A more logical way of knowing the business value!
Continue reading “Business Valuation After The 2017 Tax Cut And Jobs Act”