GlobalBX

Multiple Owners Could Mean Multiple Headaches
Some business owners have the privilege of controlling 100 percent of their enterprise.  These companies are sole-owner entities.  You have no one to answer to but yourself in the event of business challenges, but all the success you achieve is yours and yours alone.  For everyone else – caution and a good “prenuptial” agreement is vital.  With companies that have more than one owner, no matter how small some of those ownership shares might be, a great deal of angst and potential bitterness – not to mention litigation – can be avoided by starting the business with a buy-sell agreement already in place.

What is a Buy-Sell Agreement?
In basic terms, a buy-sell agreement is a document that describes a prearranged plan to account for the disposition of ownership shares under a variety of circumstances.  The agreement should be written to cover a wide range of contingencies, including death, divorce, incapacitation, personal bankruptcy, retirement, or just plain got-tired-and-want-to-sell syndrome.  The agreement will also include limits on the sale of ownership shares under non-catastrophic conditions, as well as who gets first crack at the seller’s portion and how a price is determined.

Trigger Points in the Agreement
Some portion of the buy-sell agreement should discuss a factor known as trigger points, which is the occasion upon which a certain clause takes effect.  If one owner decides to retire, you may not want their ownership share to outlive that.  If a divorce takes place, it is better for the corporation to decide who gets custody of those shares before they end up in the hands of a disgruntled spouse.  In case of death, the remaining owners will probably want first crack at the deceased person’s portion of the business rather than see those shares under the control of a relative who has no concept of what the business needs to keep it running smoothly.  In this latter case, it is not unusual for the company to take out life insurance policies on its principal owners, which would provide the necessary funds to acquire the shares from the survivors.

Deciding the Value of a Buyout
When a company first gets started, it’s fairly easy to determine the value of an ownership share.  This is oftentimes calculated on the money and/or sweat equity each respective owner brings to the start-up.  But after the company has been around a while, those old valuation methods don’t hold up quite as well.  Probably the best way to place a value on the business in general – and then extrapolate it to each owner’s share, based upon the percentage he or she holds – is to agree in advance that a professional business appraiser will be retained to establish the price.  If everyone can agree on a single appraisal, that’s great.  In other circumstances, it may be necessary to have several appraisers examine the books and the market before rendering a decision, at which point a disinterested third party would be engaged to iron out the differences.  Again, getting all these concerns out of the way in the beginning saves a lot of time and headaches when it comes time to make the sale.

Flexibility is the Key
One of the biggest concerns when contemplating the creation of a buy-sell agreement involves the amount of money it may take to do the deal.  The need to come up with 100 percent of the cash to achieve a buyout can be a daunting consideration.  Standard terms to avoid such a concern involve a provision to pay 25 to 30 percent immediately, with the balance remitted monthly or quarterly over the course of three to five years – at a fair rate of interest, of course.  In the event there are multiple minority owners and a single majority entity, something called a drag-along-and-tag-along provision is fairly common.  This clause stipulates that a decision by the majority owner to sell to a third party automatically requires the minority owners to sell as well, but it also promises them the same price per share the majority owner has negotiated.  Finally, every buy-sell agreement should include the right of first refusal.  If an owner finds an outside party to buy his or her share of the business, they must first allow the remaining partner(s) to match the sale price.

Looking to sell a business? Did you know you can sell your business for FREE at GlobalBX?  Sell your business today!

Looking to buy a business or buy a franchise? We have over 32,000 Businesses For Sale and 100s of Franchise Opportunities – get FREE information today!