Anticipate your Business Strategy with a Buy Sell Agreement
Hi reader’s. You know one of the sad facts in life is that so many people get divorced nowadays. I don’t know what the rate is today. It used to be like 50% of marriages ended in divorce.
Well drawing a parallel, 100% of businesses end at one point or another. Whenever you start a business and there’s two or more owners because you know it’s going to end one day, you need to have what would be a prenuptial agreement.
In marriage if you knew it was going to end, you might have a prenuptial agreement at the beginning saying this is how we are going to deal with these issues when the breakup comes and we hope that’s never the case but it happens.
In business though, it’s 100% for sure that when there’s two or more owners in business it’s going to come apart. Either they are going to sell the business to a third party or they are going to part ways. More often than not they do part ways during the life of the business.
Why not have that business prenuptial, if you will which is actually something that we call a buy/sell agreement. A buy/sell agreement deals with some key issues. One of the key issues is how are we going to determine what the business is worth?
When a marriage breaks up and somebody owns a business there’s this big fight as to what the value of that business is so it can be allocated appropriately. Obviously the spouse with the business thinks it’s not worth very much and the spouse that doesn’t have the business thinks it’s worth a whole bunch.
Likewise on the buy/sell side. We find the business owners, the one going away certainly thinks the business is worth a ton and the one staying says, “No, no, not so much.”
While you’re still friends and while you’re still getting along and hopefully right when you begin the business, you put a buy/sell agreement into place that defines how value will be determined whether it’s a stated price, some formula that gets applied, or you bring in a business valuation person to determine value objectively at the time. There’s a lot of different ways to define it but value determination first.
Second issue how quick do I get my money? Now if you’re the one who’s staying in the business you don’t want to strap the business by having to come up with a whole bunch of cash to buy this other person out who wants to go away. From your perspective you’d like to make it a very slow process.
The other person needing to be the one going away obviously wants the cash up front. There’s a compromise that happens there. When you deal with this issue; if you’re dealing with it upfront you don’t know if you’re going to be the buyer or the seller so you need to take a relatively fair position and maybe say when one person goes away we’re going to give them 20% down and pay the rest out over seven years or something like that, or five years. There’s a lot of different ways to do it.
What’s the business worth? How quickly am I going to get paid out? Those are two core issues that go into the development of a buy/sell. There’s a variety of other issues both those are the two most important to focus on.
If you’re getting into business or even if you’re already in business and there are two or more owners, make sure you get a buy/sell agreement put into place. Don’t put it off because it’s just a landmine waiting to sink you later on.