A Buy-Sell Provision.

 

A Buy-Sell Agreement is a partnership among the owners of a business in which each shareholder agrees that upon the occurrence of a specified event (death, disability, termination of employment, etc.), their shares (interest) will be sold to the surviving owners at a specific price. Additionally, each owner commits to buy the shares of their departing co-owner upon the occurrence of  said specified event.

 

Buy-Sell Agreements can be funded (usually with life insurance) or unfunded (usually with promises to pay). Funding a Buy-Sell Agreement with life insurance is usually the most practical method – the heirs get cash and walk away, and the surviving owner gets the deceased owner’s shares immediately. Unfunded Buy-Sell Agreements are usually better than no agreement, but raise the spector of the odds of the heirs not getting paid. Quite often the earnings are not sufficient to pay off the heirs.

 

There are generally three different types of buy-sell agreements:

• Cross-Purchase Agreement: A cross-purchase agreement allows the remaining co-owners to purchase the interest of a departing owner. Each co-owner must have sufficient capital to make the purchase. For the death of an owner, each shareholder generally acquires a life insurance policy on the lives of the other partners, and the death benefits received are required to be used to purchase the deceased owner’s interest.
• Entity (or Redemption) Purchase Agreement: An entity purchase agreement requires the business to purchase the interest of a departing owner. After the purchase, the remaining partners would be the only owners of the entity. It is also common to fund the purchase with a life insurance policy purchased by the business.
• Hybrid Agreement: A hybrid agreement provides that the remaining owners and the business itself purchase the interest of a departing partner. With a hybrid agreement, it is possible to give the individual owners the right to acquire the interest, but not the obligation. If the shareholders decline, the business would be obligated to acquire the interest of the departing owner. Alternatively, the agreement may allow for both the remaining owners and the company to purchase the departing partner’s interest. Therefore the hybrid agreement is the most flexible form of buy-sell agreement, having characteristics of both the cross-purchase and the entity-redemption agreement.

 

The valuation section of a buy-sell agreement is very important because it defines how the division of the owner’s interest will be valued when there is a change in ownership. Changes will inevitably occur as partners or shareholders of closely-held companies will eventually decide to part voluntarily or an event such as the death of a partner triggers the buy-sell agreement. If this section of the agreement is skipped, it will lead to increased costs and a prolonged period of negotiation to determine the value of the interest at the time of the change.

 

Insights into navigating negotiations to sell your business.

 

Tips and techniques to help you get the deal done

Once you’ve decided to sell your company and have found the right buyer, you’ll quickly begin negotiating the terms of your deal and price. In developing your negotiation strategy, you’ll start thinking about the current economic environment, asking questions like “Is it a buyer’s market or a seller’s market?” Alternatively, you may be wondering, “How far can I push to get the terms most beneficial to me in today’s environment?”

 

There are some tips and techniques that can help you when it comes time to sit down and get a deal done, no matter what side of the table you’re on.

Price isn’t everything. So often deals involving small and mid-sized companies focus on price but don’t ignore terms, they matter. The terms of the deal can have a critical impact on how you are paid, or how you pay, for a business. Terms affect the real price of the business, so they must be examined beyond just the nominal price that has been agreed upon.

Know your “walk-away” number. This may sound elementary, but you need to have an understanding of what’s reasonable when it comes to the price of an asset. Know your minimum. Know your max. And know these in advance. Put in the time and effort early on to research and fully understand your walk-away so that you will stay disciplined at the table.

Making the first offer can be an advantage. Conventional wisdom says that laying out the first offer is detrimental. But as we see proven time and time again in behavioral psychology, tipping your hand can anchor the conversations and can significantly influence subsequent terms in the discussion. However, employ this tactic with caution: only do so when you know you have an information advantage.

Know who’s on the other side of the table. Not just by name, but really know them and know what they really want. Understand your counterpart’s motivation. Would this deal be a big feather in their cap? Is it their first deal? What does their compensation structure look like? What about their past experience? What industries have they worked in? What are they passionate about? Often, the answers to each of these questions are different, but understanding the motivations of your negotiation counterpart from all viewpoints can help you organize your approach and increase your bargaining power.

Concede small victories – and let them be known. When you’re at the negotiating table, have a predetermined list of pieces of the deal you’re willing to bend or concede on. Doing so will create small victories for your counterpart – so long as you make it known. What’s the value of conceding on something if the other side of the table doesn’t recognize it? To make strategic concessions, follow these four steps:

1.  When you give something up, make it known.

2.  Decide how the other side can reciprocate and demand that they do so.

3.  If mutual trust hasn’t been established, offer a contingent concession: we’ll do this if you do that.

4.  Concede in installments. Essentially, this means that people like receiving positives over time. So when you have your list of elements you’re willing to concede, don’t unload them all at once; instead, spread them out over the course of the discussions.

 

 

Sincerely,

 

Sidney Turner

 

Sidney Turner, LLC

Legal Insight, Business Strategy

4800 N. Federal Highway, Suite 307B

Boca Raton, FL 33431

Voice:  (561)-208-6383

E-mail: sturner@sidneyturnerllc.com