In my career I have experienced several business owners rushing through the implementation stages of designing their buy and sell agreement (BSA), probably one of the most important documents they will ever need, treating the process with little thought. As Rodney Dangerfield would say, “No respect”. When it was completed, it was very basic, doing more harm than good.
In some cases, maybe more than I think, the document being used by the drafting attorney was a “hand me down” from another attorney. While the “hand me down form” may have been useful in drafting another person’s situation and making it easier for the drafting attorney to do, it was not going to maximize my client’s planning situation.
In Paul Hood’s great book, “Buy And Sell Agreements, Last Will And Testament For Your Business”, he covers the consequences of not designing the right buy and sell agreement, and how important it is to spend the time and money preparing and designing this important document, with an experienced lawyer. [i]
Paul specifically speaks about attorneys using a “hand me down agreement”, and how it may be more harmful by having it than not.
The “Paul Hood Fire Drill”
He uses the idea of the “fire drill”. What happens when a “trigger happens? What will be the outcome and the consequences based on how your BSA is set up (or not set up), when you play it out. Like you were the leaving owner, and then again as the remaining owner. On a personal note, the “fire drill” advocated by Paul is something I use all the time and has been instrumental helping my clients and their attorneys in drafting the proper strategies for their situations. I have found that this has been a great way of helping my clients design the best BSA for themselves. It has allowed them to make it real and start developing questions and ideas that they can implement in their design. It keeps them involved with the process.
The “Fire Drill” strategy has put my clients in the “power seat” of knowledge, so when they discuss their BSA with their attorney, the elements and strategies that are being used are not foreign to them. This consequently helps them design a better BSA, reducing the time needed to spend with their attorney ($$$$$).
Keep in mind, many business owners start the process of designing the BSA when there has been no experience of consequences with an owner or co-owner leaving the company.
Everyone is Equal at the Start!
When owners design their BSA, they are all equal in status. People that enter into agreements want the agreement to favor them when a triggering event happens, even if the agreement has not been updated in years or there is no reference to the triggering event.
When are clients initially design their BSA, it probably will be one of the few times that all the partners will be negotiating with each other, because when there is a triggering event, chances are they will be negotiating with someone other than their co-owner.
The representative of the departing co-owner will have a different perspective as to what they want out of the BSA! Whether it is the spouse, their child, their law firm, whomever, they will be negotiating from a different point of interest.
Business relationships, and friendships are put aside. It is at this point you would hope your BSA covers all the areas of concern that need to be covered. The bottom line is the agreement must be exact as to what will specifically happen based on the triggering event. There is no room for errors if the document is specific. The best time to do this is when everyone is on equal ground.
For this reason, owners designing their BSA with their attorney should take it very seriously because they are really pre-negotiating for the people, they love the most without any certainty of which trigger will occur and which side of the trigger they will be on, leaving or a remaining co-owner.
It is extremely important that the triggering events be identified and that you will understand what will occur with each trigger event.
Paul Hood’s “fire drill” has made it easier for my clients to understand the importance of designing a solid BSA. By posing questions to the scenario, the BSA becomes very real to them.
Examples of how they would play out the “fire drill”
· What if you’re the first co-owner to leave?
· What if you’re the last remaining original owner?
· What if you end up with a co-owner you don’t want to be owners with?
· What happens if one of your co-owners, dies, divorces, or goes bankrupt?
By implementing your “fire drill”, you will start to formulate different scenarios for your own situation creating your own buy and sell design.
This is a critical document in keeping your business going should a trigger happen to any of the co-owners. Unfortunately, you must deal with it in advance and before there is a triggering event.
Risks when implementing your BSA:
· Using an attorney who is using a fill in the blank form.
· Not planning the scenarios before designing the plan.
· Not having a BSA.
· Not signing it.
· No dealing with how to fund such triggers.
There are so many elements to the buy and sell agreement that need to be covered, the planning of this document can’t be taken lightly. However, that is not to say you can’t have a great BSA. Having experienced professionals to help guide you through the process will pay off great benefits in designing and implementing your BSA.
We suggest you find competent counsel who has experience in designing the buy and sell agreements and discuss your goals and objectives with them.
Again, my best advice is pick up Paul Hoods book (“Buy and Sell Agreements, last will and testament for your businesss”.) Read and study it.
If you would like our free Business Succession and Transition Planning Guide, click the link and we will send you a FREE WHITE PAPER to get you started. in your planning. YOUR FREE GUIDE
[i] E. Paul Hood is a prolific technical author. He has published a number of books on planning and is one of the leaders in estate planning and business succession planning.