When Business Partnerships Fall Apart, Turn to This Key Document
Getting into business with one or more partners is a time of optimism and hope for a bright future. On the flip side, undoing business relationships can be like going through a personal divorce.
Hopefully a buy-sell or other shareholder agreement that all parties considered to be “fair” was drafted and signed before it was known who would be leaving the business. The buy-sell document is a critical tool to prevent additional stress when business partnerships fall apart because it legally defines how the departing owner is to be bought out—including how value should be determined and the terms of payment.
Even if you have a buy-sell agreement in place, it’s important to re-read it from time to time. Most speak only to death and disability, which can be funded relatively easily with insurance. But what if an owner quits? Is fired? Retires? Does the agreement reflect the current thinking of all owners?
If no such agreement exists or is silent as to the valuation provisions (how to arrive at a value conclusion), most situations default to hiring an independent, credentialed business appraiser to determine the fair market value of the ongoing business. This includes determining future expected cash flows and discounting these cash flows to the date of valuation (likely the date of termination), applying a discount rate that reflects the risks and opportunities specific to the business being valued. Then, discounts for lack of marketability are applied as well as minority discounts or control premiums that relate to the specific block of equity owned by the seller (minority versus control).
We’ve helped many such owners navigate this sticky situation by involving both parties (buyer and seller) and making the process transparent. This means both buyer and seller have input and both are fully involved in the process so both understand how the value conclusion was reached.
Even though the lack of valuation provisions, or any buy-sell agreement at all, can be worked around at the time of need, having these documents in place before they are needed is always smart so you reduce animosity and avoid litigation.
We like to say “never get into business with someone without knowing how you’d get out of business.”
If you’re interested in talking about your current provisions, or need to put some in place, please feel free to contact Cathy at the email below.
Cathy is the President of Capital Valuation Group, Inc., headquartered in Madison, WI. Capital Valuation Group has been helping business owners across the country understand, increase and unlock the value of their businesses for over 40 years through keynote speaking, valuation analysis, determining damages and providing expert witness testimony. Cathy can be reached at .