In August, Chris Mercer, the author of Buy-Sell Agreements for Closely Held and Family Business Owners, spoke in Ft. Lauderdale. He graciously is allowing me to summarize information from his presentation in this post.
Most business owners do not think of the various events that could cause a buy-sell agreement to be triggered. Chris lists the 20 “Ds” that shareholders can be addressed in their buy-sell agreements (including events which trigger the buyout provisions):
- Departure – Trigger event, the shareholder quits his job with the company
- Discharge – Trigger event, the shareholder is fired
- Death – Trigger event, the shareholder dies
- Divorce – Trigger event, the shareholder gets divorced resulting in the transfer of an interest
- Disability – Trigger event, the shareholder is disabled (should address what constitutes a disability and the length of time before this event triggers a buy-out)
- Default – Trigger event, a shareholder’s interest is transferred due to personal bankruptcy or other involuntary transfer
- Disqualification –Possible trigger event, a shareholder loses his license or regulatory approval to work in the business or to hold his or her shares
- Disaffection – A shareholder becomes dissatisfied with the company and needs to be terminated from employment (Chris indicates that this may seem like a stretch.)
- Disagreement – Shareholders reach a deadlock, the buy-sell agreement should address how to resolve the deadlock, whether it be a way to break the deadlock or the trigger of the buy-sell provisions
- Disclosure – Provisions for preserving the assets of the company, including trade secrets, customer lists and other confidential information
- Dispute resolution – Address the process for settling disputes, whether it be mediation or arbitration, and who will pay for the process
- Dilution – Can additional shares of stock be issued and will existing shareholders’ interests be protected from dilution?
- Dividends – Specifying a dividend payment policy can provide minority shareholders with the right to receive cash from the company, when profitable. It can also provide that the company withhold dividends to pay for capital projects or to repay debt. In any case, a policy can eliminate disagreements between minority and control shareholders.
- Distributions – For pass-through entities, profits and losses are taxed at the individual level. In addition to clarifying the distribution process to protect minority shareholders, a distribution policy can guaranty that enough cash is distributed to pay income taxes on profits.
- Drag-along rights – When a controlling shareholder receives an offer to purchase stock, drag-along rights can force the remaining minority shareholders to sell their stock. (Tag-along rights provide that minority shareholders can force a controlling shareholder to sell the minority shares with the control shares.)
- Double entities – When separate companies are used for other aspects of operations, such as owning real estate, leasing employees or offshore sales, it may be appropriate to have similar provisions in each of the agreements, and have trigger events coincide with each other.
- Differential pricing – Since shareholders determine the price for buy-sell agreements, they can decide on different pricing for different events. For example, upon death or disability, 100% of the price may be paid, whereas on termination with cause, only 75% of the price may be paid.
- Don’t compete agreements – Non-compete agreements may be separate documents, however, a buy-sell agreement can require a departing shareholder to sign a non-compete agreement or a non-solicitation agreement when his or her shares are purchased. (Consult an attorney regarding the terms and enforceability.)
- Donate – The buy-sell agreement may restrict transfer to certain parties such as spouse, lineal descendants, siblings, trusts or charities.
- Distributions after a trigger event – Buy-sell agreements can address what happens to dividends and distributions after the trigger day, since it can often take months or years to resolve disputes.
There are numerous other provisions that could (or should) be included in a buy-sell agreement depending upon the nature and structure of the company. Consult your attorney to write your buy-sell agreement. It is a legal document which will affect your rights should a trigger event happen.
There are online tools if you want to take a stab at looking at your buy-sell agreement such as http://buysellagreementsonline.com/buy-sell-agreement-audit-checklist/.
If you have questions on how the different events affect value or the price you will get under a buy-sell agreement, please contact me.
©2010 Florida Business Valuation Group
