A couple of weeks ago, this sad headline popped up in the business section of my local newspaper:
Lunds & Byerlys caught in the middle of sibling court battle
A sister wants to cash out her shares, but the company is disputing the valuation
Lunds & Byerly’s is a local, upscale supermarket chain that is owned by the Lunds siblings. One sibling wanted out of the business, and they couldn’t agree on value or how to buy her out. So, the Lunds family spent tons of time and money fighting and then, because they couldn’t agree, five days in court in front of a judge. Four siblings fighting about the value of the company--because one sibling wanted out--and they didn’t have a written agreement that effectively dealt with how they would value the company and what the process would be for a buy-out.
This made me think of the numerous times a business owner has suggested that they didn’t need a written agreement because they trust the other person. Or they thought a written contract would be good, but didn’t want to be “too legal” (whatever that is). Or, they knew they should have it in writing, but it’s family, and they didn’t want to rock the boat. Or, they didn’t want to go through the expense.
Talk about rocking the boat! Talk about expensive!
What a colossal waste of time and money that could have so easily been prevented with a buy-sell agreement. Not to mention the negative impact on the business due to the distraction of sibling fights and litigation.
And, the most important point: if the family had taken the time to agree on the terms of a buy-sell agreement in the beginning, they would have had procedures in place. Relationships may still have been strained, but they would have a much better chance of being preserved.
In this case, relationships were strained to the extent that the feuding siblings communicated through lawyers, and the trial ended with the judge passing on the benefit of her Sunday sermon:
Those words came from Jesus’ Sermon on the Mount in the Book of Matthew: “But I tell you that anyone who is angry with a brother or sister will be subject to judgment,” as the New International Version puts it. She followed that with a dollop of Niebuhr: “Family life is too intimate to be preserved by the spirit of justice. It can be sustained by a spirit of love that goes beyond justice.”
And I agree. Family is the most important asset!
What is It?
A buy-sell agreement is a contract that is legally binding. It provides a detailed plan for what happens if someone leaves the business or if their ownership interest is subject to an “outside event.” Someone leaving could be the result of a variety of situations such as disagreements among the owners, desire to sell shares, disability, retirement, death, or an “outside event.” An outside event includes events like divorce or personal bankruptcy, where an owners interest is regarded as a personal asset to be divided or sold by the court (something you DON’T want in your business).
Think of it like this, what would happen if you or one of your partners was suddenly unable or unwilling to work? Or, as was the case with the Lunds, what if one of you wants or needs to be out of the business? Suddenly you’re faced with someone else’s workload on top of yours AND you have to figure out how to buy back their business interest in a way that doesn’t cripple business operations. Having a fair plan that describes what happens if one of the partners needs to step down helps to ensure that the business continues to run without a hitch. That is the purpose of a buy-sell agreement, and it is essential to the health of your business.
Advantages of a Buy-Sell Agreement
Buy-sell agreements are designed to protect the company as a going concern. They also provide a clear framework for company owners.
Owners decide what happens to the business when someone leaves before the fact, and when everyone is getting along well. This ensures that emotions and other outside influences are not the driving force and that decisions are clear-headed. It helps to minimize stress and dispute between the remaining co-owners by having a clear strategy in place. (Granted, someone can always pick a fight, but it’s more difficult if you have a written agreement in place.) The agreement lays out a clear plan and buyout terms for the departing owners
Creating your Buy-Sell Agreement
Each buy-sell agreement should address four key issues: who can buy the available ownership interest, events that trigger a buyout, funding sources and payment, and buyout price (commonly referred to as “valuation”). Making sure you have these details in writing minimizes the odds of playing “family feud” or duking it out with your (former) best friend. A buy-sell protects your business by providing clarity on business continuation in the event of a buyout for any reason.
And last, but not least, make sure you have your lawyer draft your buy-sell. Buy-sell agreements are sophisticated agreements with significant tax consequences.