In the past year I have worked with more than one family business on the topic of shareholder (or buy-sell) agreements. Some of the families have worked together harmoniously, while others have had difficulty discussing and coming to agreement on the document. However, even the families who worked harmoniously on the document needed a lot of individual help in understanding the components of the agreement and how those components affected them as individuals, the family, and the business. The importance of a current, understood buy-sell agreement can save a family business from a lot of potential grief.
A buy-sell agreement is a document that should reflect, in a fair way, the wishes and wants of the owners involved. When the buy-sell is triggered by an event (such as death, disability, or selling/transferring of shares), the owners are usually experiencing a bit of (or a lot of) increased anxiety. The triggering event could simply be the decision to sell or gift shares, or it could be as traumatic as the disability or death of an owner. In any case, other owners are affected by the event and change is at hand. Change causes anxiety.
Some owners get concerned about the potential future partners—a change that they don’t necessarily have a lot of control over. This was the case with one family I worked with in the past year. One of the shareholders—a sibling—was concerned that if his partner (a sister) wanted to gift her shares, the brother would be partners with his nephews, whom he felt were not ready to be owners. He was feeling particularly anxious because he didn’t want to hurt anyone’s feelings but wanted to protect his interests. He felt trapped. We had time on our side, and did a lot of discussion among the current shareholders, lawyer, accountant, and insurance team to come up with options that made all parties comfortable.
A different situation with another family occurred when an owner wanted to sell for all positive reasons and the other owners were comfortable taking over the shares, but heightened emotions revolved around giving up the legacy that their grandfather started. The buy-sell options were explored and vetted, opinions and feelings shared, and the agreement made, but it took time and courage to discuss wants, needs, fears, and options.
Many times in a family business there are partners who have no idea what the shareholders agreement states, or the buy-sell agreement is not up to date. This is a wonderful opportunity to have a family meeting that reviews the terms of the agreement. A third-party facilitator is sometimes needed to ask tough questions and review/explain terms, but the ability of the family to meet regarding the agreement is a good forum for education and development of trust for all shareholders.
The process of vetting the agreement is particularly helpful. If you already have an agreement in place, set a date to review and explore potential outcomes with your partners each year. Here are some simple items to consider regarding your shareholders agreement:
- Balance the rights of the minority owners versus majority owners.
- One time per year, have an opportunity to put shares up for sale or transfer.
- Annual valuation is very important. When there are disputes regarding buy/sell, it is usually around four areas: standard of valuation, date of valuation, discounts for lack of control, and discounts for lack of marketability.
- Get a formula for valuation that everyone understands and agrees with that is somewhat a plug-and-play for the business.
- Each year, everyone needs to agree on—and certify—valuation.
- If you have an S corporation, make sure the buy-sell does not create a second class of stock.
Do you know the terms of your shareholders agreement? Is it up to date? Do you have adequate insurance for coverage if needed? If you and all of your partners do not know the answer to any of these questions, it is time for a review. Save your family and business from potential anguish—get them up to date.