| p>This article is a warning against the blind use of | | | | the other CPAs be business appraisers or have |
| legal forms, or templates, for developing buy-sell | | | | appraisal credentials. |
| agreements. Parties to each and every buy-sell | | | | It was not clear whether the life insurance the |
| agreement need to take time to agree on the | | | | company might purchase (at its election) should |
| key business and valuation aspects of their | | | | be considered to be a corporate asset (and |
| agreements, then have a qualified attorney (who | | | | added to value in the determination of price) or as |
| can also be involved in reaching agreement) draw | | | | a funding mechanism only, and not added to value. |
| up the document. | | | | The CPA would, in his or her sole discretion, have |
| What could be simpler? All the parties have to do | | | | to make that decision. |
| is to agree on the events that "trigger" the | | | | This agreement, if implemented, would be a |
| buy-sell agreement, on who buys stock, and on | | | | disaster waiting to happen. |
| the pricing and terms of the purchase. Also, it is | | | | An identical form was found on another website. |
| helpful if the funding for the transaction is | | | | - A corporate buy-sell agreement. |
| specified, as well. The problem is, if my | | | | This agreement template suggested either an |
| experience is any indication, these things are | | | | agreed value, or a formula value, but only blanks |
| almost never agreed to at the level at which it is | | | | for the formula were provided. The most likely |
| necessary for the shareholders to understand | | | | valuation mechanism was then defined: |
| what will happen when their buy-sell agreements | | | | "Purchase Price in Lieu of Establishment of Current |
| are triggered by the quitting, firing, retiring, death, | | | | Agreed Value. In the event the Shareholders do |
| disability, divorce, etc. of a shareholder. | | | | not establish an Agreed Value for more than two |
| Keep in mind that I am not a lawyer and do not | | | | (2) years prior to the Date of Death or |
| draft buy-sell agreements. I am, however, a | | | | Withdrawal or Date of Occurrence, then the |
| business appraiser who has seen hundreds of | | | | Agreed Value shall be calculated by an |
| buy-sell agreements as part of our normal | | | | independent Certified Public Accountant acceptable |
| valuation practice - too many of which after failed | | | | to a majority of the shareholders. The accountant |
| valuation processes when litigation has already | | | | shall determine the fair market value of the Stock |
| ensued. As such, I read and interpret buy-sell | | | | as of the Date of Death or Withdrawal or Date |
| agreements from business and valuation | | | | of Occurrence, as appropriate, by whatever |
| perspectives in the normal course of my business | | | | means he deems appropriate. This fair market |
| and I can say that relatively few of them address | | | | value shall then become the Agreed Value. The |
| the basic questions in unambiguous terms. Could | | | | accountant may apply whatever discounts he |
| this be because, in part, too many people rely | | | | believes appropriate, including discounts for lack of |
| upon standard forms rather than doing the | | | | marketability. The fees and expenses of the |
| sometimes difficult work of sitting down together | | | | accountant shall be paid by the Company." |
| to agree to the key business and valuation | | | | (emphasis added) |
| issues? | | | | Should the CPA have appraisal credentials? Is the |
| Over the 2009 New Year holidays, I did some | | | | appropriate "fair market value" that of the entire |
| fairly unscientific research. I Googled the terms | | | | company or of just the interest in the company |
| "buy-sell agreements" and "buy-sell agreement | | | | subject to the agreement? Note that a minority |
| forms." In searching quite deep into the rankings, | | | | shareholder subject to the agreement might have |
| six forms were found that were available on-line | | | | no say whatsoever in the selection of the CPA, |
| and free. There are numerous sites that charge | | | | since the selection will be determined by a |
| for buy-sell agreement forms, and others that | | | | majority of the shareholders by number. If there |
| claim to offer templates "for free," but require a | | | | are at least three shareholders, this situation could |
| "membership" to access them. At another time, I'll | | | | easily occur. |
| set a budget and go form-shopping to see if the | | | | - A right of first refusal. |
| results are different. Of the six free templates | | | | Another agreement template entitled "Buy-Sell |
| found, I noted the following: | | | | Agreement Between Stockholders" was nothing |
| - A cross-purchase agreement. | | | | more than an onerous right of first refusal and |
| One was a cross-purchase agreement template | | | | was not a buy-sell agreement at all. |
| calling for each of two shareholders to purchase | | | | - A public company voting trust. |
| life insurance on the life of the other. They had to | | | | The last free buy-sell agreement template found |
| agree on value periodically. Did I say that | | | | involved the creation of a voting trust of a |
| shareholders almost never do this? There was no | | | | presumably public company. The pricing for |
| other pricing mechanism. | | | | transactions pursuant to the agreement was the |
| - A (valuation) process agreement. | | | | average of the opening and closing prices on the |
| This template addressed only death and | | | | specified notification date. There were voting and |
| termination of employment and no other trigger | | | | nonvoting shares. The agreement did specify that |
| events (e.g., divorce or disability). The pricing | | | | there would be no differential in pricing between |
| mechanism read as follows: | | | | the two types of shares. |
| "Unless the parties agree to another price in | | | | There's an old saying: "There's no such thing as a |
| writing, the price for each share of capital stock | | | | free lunch." My search for buy-sell agreement |
| shall be equal to its fair market value as an | | | | template language would suggest that there's no |
| ongoing business concern as determined in the | | | | such thing as a free and workable buy-sell |
| sole discretion of the company's Certified Public | | | | agreement form. Perhaps the forms that carry a |
| Accountant (CPA), and such determination shall be | | | | price are better. Those ranged from $2.99 to |
| binding and conclusive upon the parties hereto." | | | | $79.00. Given this pricing, keep in mind another |
| "Fair market value" is generally thought to be a | | | | saying: "You pays your money and you takes |
| defined term among business appraisers, but | | | | your chances." |
| what if the company's CPA is not an appraiser? | | | | In conclusion, if the shareholders agree on the |
| The definition above leaves open to the sole | | | | pertinent business and valuation points, any |
| discretion of the CPA, who may not be qualified | | | | experienced business attorney should be able to |
| as an appraiser, as to whether valuation discounts, | | | | reflect that appropriately in the buy-sell |
| such as minority interest or marketability | | | | agreement. My business and valuation advice is |
| discounts, should be considered and/or applied in | | | | straightforward. Do not blindly use any template |
| the determination of price. Would you want an | | | | when creating a buy-sell agreement. Rather, get |
| unqualified CPA making such decisions? Would he | | | | agreement on critical issues and then modify |
| or she want to make them? | | | | whatever form is used to reflect the actual |
| This agreement also had a deadlock provision in | | | | agreement of the parties. And in the likely event |
| the event that the parties could not agree on the | | | | that you have a buy-sell agreement and don't |
| company's CPA. In that event, the shareholder's | | | | know the answers to the basic questions |
| estate and the company would each select a | | | | mentioned above, now would be a good time to |
| CPA, the two of which would select a third CPA. | | | | convene a meeting of the shareholders to |
| The price would be the average of the three | | | | consider revising the buy-sell agreement. |
| conclusions. Note that there is no requirement that | | | | |