The Buy-sell section defines how the value of one’s share in the partnership will be valued when certain triggering events occur. Triggering events can include, but are not limited to the following:
- Is Fired
- Becomes Disabled
- Becomes Divorced
I often refer to these triggering events as the 4-D’s –Death, Divorce, Desertion, Disabled (mentally or physically). When one of these events occurs, it prompts the question “what’s next?” How do you go about getting the business valued after a triggering event has occurred?
More often than not, any of these triggering events is the first domino to a long and arduous legal battle with both sides hiring their legal team and each side hiring their own business appraiser. A commonly used technique is to then hire a third appraiser if the two appraisers do not come to a conclusion of value within 10% of each other. I think you can see that this can be a blood bath with both sides hemorrhaging tens of thousands of dollars.
These triggering events can devastate even the strongest of companies, not to mention bankrupt families and family relationships, as well as ending lifelong friendships. The best alternative is to have a plan in place to deal with the aftermath of a triggering event. This plan of attack should be written in the Buy-Sell section of your operating agreement and can be created any time prior to a triggering event. Here is what I feel is the best avenue towards a solid defensible valuation and a harmonious transition beyond triggering events. Written in the Operating Agreement the parties agree upon the following:
- Nominate a business appraiser to value the business.
- Value the business immediately. At this point all parties will know what their investment in the partnership is worth.
- Plan on having a review appraisal every 1 to 2 years. This will allow all parties to know how much their share of the business is worth and will generally cost less than the initial appraisal. The annual appraisal also serves as a management tool to direct, manage and motivate the team as they see the “value” in their business!
Within the buy-sell agreement there should be specific language defining the agreed upon specifics of what will be considered when valuing the company. Some of the items to be defined include how to establish the date of value to be used following a triggering event, should life insurance be purchased on key partners, the appraisal standard to be used and will the value be appraised as Fair Value or Fair Market Value.
Having a buy-sell agreement in place will allow you to focus on running the company and doing what you do best.
For more information on having your business appraised, or if you would like a buy-sell agreement checklist, send me an e-mail at Matt@AnalyticBusinessAppraisers.com or give me a call at 480-857-7449.
Hope you all had a productive Summer and are looking forward to the cooler fall weather ahead!
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