Why Buy-Sell Agreements Are Tough for Owners to Talk About
By Nina Kaufman, Esq.I finally finished Z. Christopher Mercer’s book, Buy/Sell Agreements: Ticking Time Bombs or Reasonable Resolutions? Through no fault of Mercer’s, a number of things got in the way (work projects, travel schedule, the need to tune out/take a break/read trashy murder mysteries) of my reading through this intelligent and straightforward book — as I had promised I would earlier this year.
While Buy/Sell Agreements isn’t what I’d call light reading, it’s certainly accessible and amply illustrates Mercer’s fundamental point: that buy/sell agreements aren’t just legal contracts — they’re also business and valuation documents. No surprise, then, to learn that Mercer is not an attorney (heaven forfend!), but rather, a business valuation specialist with extensive experience in corporate valuation and investment banking services.
It’s in the valuation where so many agreements, downloaded from the Internet, have glaring omissions. They don’t explore what the company is worth, how ownership interests will be transferred, and when owners get paid for that interest. Why is that so crucial? As Mercer notes, because you can’t predict the future — you never know who will be the buyer and who will be the seller when the times comes.
Makes sense, but business owners still don’t want to talk about it. For any number of reasons, such as:
- They don’t want to rack up legal fees
- They don’t want to talk about the unpleasant “what-ifs” (“what if you die?” “what if I cheat you?”)
- There may be a power imbalance that the business owners don’t want to address
As Mercer notes, that imbalance can show up in a number of scenarios, like:
- One owner has been in the business for over 30 years; the other for only 10
- One owner controls a majority (or more) of the company
- One owner is an active “sweat equity” owner; the other is inactive, but provides financial capital
- One owner has put a lot on the line through personal guaranties for loans; the other (with perhaps a poor credit rating) has not
Are any of these factors getting in your way of talking about your ownership, or buy/sell agreements?
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