How the “Wait and See Buy And Sell” Works !

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements

The Wait and See Buy and Sell arrangement is a combination of using a Stock Redemption and a Cross Purchase arrangement.  It affords both the company and the continuing owners the option to purchase an owner’s interest with great flexibility when a buyout situation presents itself .  Usually the company gets the first opportunity to purchase any  or all of the transferring owner’s interest.  Any balance of interest not purchased by the company, can be purchased by the continuing owners.  If the owners don’t buy the  remaining interests, the corporation must purchase them!

The “Wait and See” agreement gives flexibility to the owners in areas of:

  • Financing the purchase of interest
  • Cost basis positioning
  • Estate planning
  • Other planning areas
  • Changing the percentage of ownership

The biggest advantage however, is the ability of not having to make a decision until there is a trigger event. 

The Scenario

When a notice is received by the company of an option to purchase, whether it’s by a Notice of Intent To Transfer, right of first Referral, or notice of a business-disrupting event such as the retirement, divorce, disability, or death of an owner, the procedure for the option to purchase an Owner’s Interest in an agreement is triggered.  No matter how informally the notice may be given, it’s important to understand that the amount of time the company has to decide whether to purchase (the option period) starts to tick only after the company knows that the triggering event has occurred.  For example, if the company does not receive a formal notice that an owner has filed for bankruptcy.  Only when the company becomes aware of the bankruptcy does the buyback right get triggered, and the option period starts to run.

Company’s Option to Purchase

After the company receives notice, the company’s owners should meet with their tax advisors and each other to decide if it’s in their best interest for the company itself to buy the available interest.  The agreement will normally have a period of time in the agreement which stipulates the period of time the parties have to decide individually whether they want to purchase the available interest or not.  If the owners decide the company should buy all of the available interest, the company must exercise its option by delivery a written Notice of Intent to Purchase to the transferring owner within the designated time period.

 Notice of Intent Contents (THE NOTICE):

If the company or anyone of the continuing owners exercise their option to buy the available interest, the company sends out a collective notice to the transferring owner, or the current holder of the interest, regarding the company’s and /or continuing owner’s intent to purchase a part, or all of the available interest (called a Notice of Intent to Purchase).

Generally, the Notice is sent to the person who provided the original notice to the company of a proposed transfer, or the occurrence of any of the triggering events that give rise to a buyback.  Example:  NOTICE is sent to the interest of a deceased owner will go to the representative of the estate.

 THE NOTICE CONTENTS;

The name and address of the company and the name, title of the officer or employee who can be contacted at the company regarding the NOTICE.  A description and the amount of ownership interest to be purchased by the company/party, along with name and address of each party.  The total amount of interests to be purchased by the parties. The terms of the purchase are based on the agreement Copy of the buy and sell agreement. If the interest to be purchased is represented by certificates, such as share certificates, a request for surrender of the share certificates is made to the company.

Continue reading “How the “Wait and See Buy And Sell” Works !” →

Characteristics Of An Effective Buy –Sell Agreement!

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements

Creating a buy-sell agreement requires foresight about what could, might and will happen to the business if certain situations occur to the equity owner’s/stock holders of the company. This article looks at some of the important elements of the buy-sell agreement (BSA).

First of all, what is the purpose of the BSA?  Simply, an agreement between, interest holders, and the corporation as to what will happen to the company and interest holders should there be a disruptive and harmful occurrence in the future.  These are called triggers; death, disability, divorce, departure (voluntary and non-voluntary), bankruptcy, retirement, and others.

It is important that the agreement be entered into when parties are aligned and before triggers events occur.  It usually is a time when the relationship is aligned for the good of the interest holders and the company.  In short, they usually are of the same mindset that any of the triggering events could happen to them in the future,

This is a time where advisors should encourage interest owners to complete and sign the BSA, as it is the best time when their attitudes are in synch concerning future event happenings.

Interest owners know that when there is a trigger event, each party will have a different perspective as to outcomes for each person.   Terms and pricing transactions can become difficult or impossible to achieve if the issue was dealt with without an agreement in advance.

 Some of the characteristics required in the agreement;

  1. It should be in writing and signed by all parties. (good time to have spouses sign as to their witnessing and understanding of the agreements, although they are not signing as a party to the agreement)
  2. Trigger events should be defined and funding and price adjustment; Each event should be discussed as to what will happen as to the price, and the terms. Also, the definition of the trigger event should be in the agreement.  Example: definition of disability? What happens if a person is fired? What happens if a person decides just to leave?  What happens upon a divorce, or bankruptcy, retirement, or death?
  3. Determine the conditions that cause the triggering events.
  4. Determine the price (price per share) at the time of the triggering event.
  5. Methods of Valuation
    1. Fixed price; usually never updated with changing markets, and company condition.
    2. Formula: with all the variables of economic conditions, company conditions and market conditions, it is hard to find an accurate formula for any given company or industry.
    3. Single Annual appraisal (updated annually or bi annually); Suggest the initial pricing of the company by a single appraiser, and then update yearly or every other year.
  6. Define how the triggering event will be funded.
  7. Creating a buy-sell agreement takes future thinking by all the interest owners. There is always the “what if’s” of the future, but owners need to be aware of them and protect themselves.

The BSA is the most important document owners of a business can have.  They must have one.  Without it, there are no instructions as to what will happen, how much they will pay, and how to fund it.  There ends up being chaos, arguing, and lawsuits, not to mention the costs of fighting in the courts.

(Some great resources:  Buy-Sell Agreements for Closely Held and Family Business Owners by Z. Chris Mercer, and Buy and Sell Agreements, Paul Hood)

 

Your Business Worth

by YOUR BUSINESS WORTH, posted in Company Wealth

What is your business really worth?  If you don’t know this figure, don’t feel too bad, many business owners don’t know their real worth!

Why is knowing your worth important?  Think of it this way.

If you were to invest in the stock market, wouldn’t you want to know the current value of the company you are investing in, and the potential of it’s growth?

Business owners put time, money, and in most cases, most of their wealth in their business.  At some point you will want the wealth in your business.  It may because you want out of the business, you retire, you die, or a number of other triggers.

This blog is dedicated to sharing ideas about growing your business while putting you in the position of extracting your wealth…

Enjoy…

 

Tom Perrone

Should A Sole Owner Of A Business Have A Buy and Sell Agreement?

by YOUR BUSINESS WORTH, posted in Buy and Sell Agreements

Most business owners put a lot of time and effort into their businesses.  In many cases they would like to leave the business to their family, or at the very least, ultimately sell the business for a future value. However, life events can interfere with their wishes.  Because of this, it is important that the owner has a buy and sell agreement which will smoothly transfer the business to the heirs, but will also help establish future provisions for the family, should they retain the business.

The solo owner can engage into a buy and sell agreement (Called ONE-WAY BUY AND SELL (BSA), or, UNILATERAL BUY AND SELL) with:

  1. Their children
  2. A trust
  3. A competitor
  4. Employee or employee group
  5. Others who may be interested in the business

The reason for the BSA is to provide liquidity to family, and to have an orderly transfer of the business.

Leaving the business to: 

Children:  Not all children are capable of running a business.  In some situations, the inheriting children do not have the experience, the want, or the ability to run the business.  Even if they inherit the business and decide to sell it, they will be at the mercy of the market whims at that time. Competitors will try to buy the business for pennies on the dollar.

Spouse: The issues apply as above.  However, in many cases, the spouse is trying to replace the income of the owner.   There may be a sense of motivation to sell the business for the security of cash.

Competition:  This will allow the family to receive the business value based on the agreed price in the agreement.

Of course, if the family members are very active in the business and want to run the business, a buy and sell agreement can be set up so the children will buy the business for a stipulated price.  The spouse will receive the value of the business This can be done by funding with life insurance, or through the cash flow of the business.

There may be situations which not all of the children want to be in the business.  If that is the case, testamentary provisions can be made to equal out distribution of assets if that is a concern. Continue reading “Should A Sole Owner Of A Business Have A Buy and Sell Agreement?” →