Running a business is difficult enough without family power struggles and generational differences. Inevitably a parent will die, siblings might want out of the business, or spouses could get divorced, causing the remaining family/owners to bicker over who gets what piece of the family business pie. “No business is worth losing your family over so take the time to discuss all buy, sell, and partnership parameters before they elevate to issues and the most important relationships in your life are lost,” says Julie Gordon White, owner of BlueKey Business Brokerage M&A, a firm specializing in the sale of mid-sized companies with revenues up to $20 million.
Also known as a buyout agreement, a business prenup or a business will, a buy-sell arrangement consists of legally binding clauses made by co-owners to decide how the business will be broken up, who can buy a departing partner’s shares, how the price of the shares will be calculated, and what circumstances (i.e. death, divorce, or other life-changing scenarios) will trigger the agreement. This week on Family Biz, Gordon White suggests three things that your family should do while drafting a buy-sell agreement to avoid any future squabbles.
1) Agree upon a valuation method. The value of your business will fluctuate, so having a clearly defined and documented valuation method will alleviate future disputes at the time of sale. “One partner may think the business should be valued on a multiple of 3 (usually the buyer) while the other thinks a fair multiple is 5 (probably the seller), creating a huge discrepancy in value,” says Gordon White. You can agree to terms up front or simply agree that you will hire a mutually acceptable certified business appraiser.
2) Determine how the sale will be financed. Bank financing may or may not be available and alternative sources should be agreed upon and documented in the Agreement. Cash isn’t the only consideration to be exchanged during a sale, says Gordon White. A transfer of debt, a line of credit against receivables, and seller financing are only of few of the many ways to finance a transaction.
3) Hire professionals. Make sure that your business appraiser or valuator is an experienced transaction accountant who clearly understands the tax consequences of a change of ownership because tax mitigation can be an integral part of crafting the Agreement. “It’s not how much you get, its how much you [get to] keep, so know how much Uncle Sam is going to take before you make any final decisions,” says Gordon White.
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