I met the other day with a Business Risk Advisor and we were discussing exit planning for business owners. Our conversation evolved toward discussing risk management and business continuity during the exit planning process. We talked about various insurance strategies to protect business assets and personal ownership interests. However, I told him from my perspective the greatest risk factor for any business with more than one owner is the lack of an up-to-date buy-sell/shareholder agreement. The probability that there will be an ownership dispute or some type of triggering event is quite large for most businesses.
Often what is at stake is the survival of the business itself. If the business fails due to a poor buy-sell agreement, suddenly the value of the business equals the auction value of the assets and nobody is happy. Most business owners I have encountered have some type of buy-sell agreement drafted, but have not looked at it in years. Most often it has not been reviewed since they started the company. The outdated agreements usually have either some understated value of the business or a loosely defined formula or process for valuation if a triggering event occurs.
CenterPoint recommends that all business with shared ownership review their buy-sell/shareholder agreements annually with their business attorney and other advisors.
These agreements can contain complex and sometimes emotional topics, but the best time to discuss these is before there is an event or dispute.
The agreement should cover each triggering event (death, disability, sale to anoutside party, termination of employment, planned or voluntary retirement, and shareholder dispute)
1. You should decide:
a. Does the departing shareholder have a right or obligation to sell… and to whom?
b. Does the remaining shareholder and/or company have a right or obligation to purchase… and how?
2. How will the ownership interest in question be valued?
3. How the acquisition be funded?
4. What are the terms and conditions of any acquisition?
Often neglected is the process of revaluing the business. We recommend that the value be agreed upon annually and noted in the corporate records. The complexity of the valuation will be determined by the size of the company, the number of owners, and the likely parties that may evaluate the valuation (courts, IRS).
In summary, one of the largest and perhaps easiest risks for business owners to mitigate is to have an up-to-date buy-sell agreement and business valuation. Failing to do this could put all the business value at risk. If you are an advisor to business owners suggest that they address this area of risk.