When was the Last Time You Checked your Buy-Sell Agreement?
Most of us have been in a relationship that started off well and got so much better that we decided to “make it more permanent.” We got married, joined a church, or started a company with a like-minded friend. In those early months of building the relationship, all signs point to how perfect your decision is. We share a vision and are both/all pulling in the same direction to create our marriage or our company. Those are exciting times!
Just like any relationship, there is the effort required to make sure that years later you still share the same vision and still want to commit your combined energy to mutual goals. Steven Covey referred to making deposits in an emotional bank account. You can’t withdraw from an account unless you make a deposit in the first place. That can be very hard to do when you are balancing competing demands from customers, employees, family, and “life” in general.
Several times a year I receive calls from landscape business owners who find themselves in something of a “sticky” situation with their co-owner(s). By the time they call me, they’ve tried to fix it a few ways, but they are at the point now that they want to look at the value of the company. The original deal is no longer working for them.
Most of the time these situations are the result of a years-long eroding of their original vision and relationship. Changes will come as a business grows and adapts to its market and opportunities. Unfortunately, by the time the owner calls me, they may have been trying to “fix the problem” for a while but now are ready to “break up.”
The good news is that the owners usually have a Buy-Sell Agreement in place. The bad news is that they haven’t looked at it in a long time. Or, if they have looked at it, they know it is problematic in getting through this break-up. In the beginning, they may have even invested the extra time in working through the various scenarios and examples of how this would work when it is triggered. Most have not done that. Most had their attorney draft a “boilerplate” document that now probably doesn’t fit the situation very well.
Most of us think that we’ll never have a dispute in the future about the company. It’s like getting married. We’ve all heard “Not us! We’ll never have a serious problem in the future, so we don’t need to worry about what happens if we divorce!” Right. Chris Mercer calls this a “Ticking Time Bomb.” To avoid finding out that your Buy-Sell Agreement is going to be a problem in the future, you need to evaluate it on a regular basis and have it updated by your attorney accordingly.
You don’t want to start looking at your buy-sell agreement after you’ve already run into a problem! You can be sure that
- You will either be a buyer or a seller.
- Things will change with the business over time which requires understanding how the changes will impact the buy-sell agreement.
- Most owners don’t prioritize looking at their future death, exiting from the business due to retirement or getting bought out by a partner, or becoming disabled high on their priority list.
It’s like working on your will – you know you should do it to be a responsible steward of your resources, but it’s no fun!
What should you do? On a regular basis, you will want to review and refresh your buy-sell agreement to make sure it will operate the way your ownership team intends it to work. Review the terms from a business perspective and refine those as needed. Then you can engage your attorney to make sure your business intentions match the operation of the buy-sell agreement.
So, here’s a test: What happens if your partner wants to quit and get his payout now because he is moving to another region and needs the capital to set up another business there? How is his ownership share valued? Who buys his shares? What’s the tax impact to him and you? Will he sign a non-=compete? Is there a limit on when/how he can sell? Does the company have to buy its shares when the price is high due to current market conditions even if the value will probably drop through the next five years of a trough business cycle?
It’s a valuable exercise to go through before you and your co-owners find yourselves in a dispute. The time to set guidelines for when/how to leave and start another business is when you able are still in agreement and can discuss fair guidelines for each owner. Once you’re in a dispute, it’s hard to get to a level playing field and keep the emotions from getting in the way.
Would you like to discuss your current situation with your company’s exit plan, your buy-sell agreement, or how to get to a mutually agreeable resolution? Let’s chat. We might also discuss the market value and/or how to get started on your exit plan. Ready to sell your landscape business or grow by buying another? It’s rarely too early to think about setting goals.
I can be reached anytime via email: firstname.lastname@example.org or phone at: 224-688-8838.
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