Some of the most common business consulting advice I give Midland, Texas business owners revolves around buy/sell agreements. The creation of a buy/sell agreement involves a certain amount of future thinking. Midland business owners must think about what could, might, or will happen and develop a business consulting strategy involving writing an agreement that will work for all sides in the event an agreement is triggered at some unknown time in the future. Caprock Business Consulting regularly addresses the common business consulting issues and important characteristics of buy/sell agreements that are important for Midland-based business owners and for Midland attorneys advising them. Buy/sell agreements are entered into between corporations and their shareholders to protect Midland companies against disruptive, harmful or nonproductive owners, which includes divorcing spouses, competitors, disgruntled former employees and the like. They also provide protections for Midland-based shareholders who may, for a number of reasons, depart the company.
The estates of deceased owners need protection, as do shareholders who have been terminated, with or without cause. It is important that buy/sell agreements be the forefront of every business consulting strategy and entered into while the interests of the parties, which include Midland corporations and their shareholders, are aligned—or at least not sufficiently misaligned and they cannot discuss the business valuation aspects of their buy/sell agreements. To the extent possible, Midland attorneys should encourage Midland-based business owners to enter into buy/sell agreements or review their agreements and update them, if they’re out of date or circumstances have changed. It may seem obvious, but if there is no agreement between the shareholders and the Midland company, then there is no buy/sell agreement. Such agreements must be evidenced by writing of the agreement and by the signers of all parties who will be subject to the agreement. Buy/sell agreements are not always easy to obtain. Midland-based shareholders have different backgrounds, financial positions, personal outlooks and involvement with a Midland business or businesses. So, the agreement is not automatic. However, it is important that Midland attorneys continue to work with clients to encourage that the agreement and the business owners remain committed to reaching an agreement. Each party should sign the buy/sell agreement, which is part of Caprock Business Consulting’s strategy. The point in time at which an agreement is reached is the date of the signing of each particular buy/sell agreement.
When the shareholders of a new Midland venture come together to discuss a buy/sell agreement, it is foreseeable that many things can happen that will trigger the operation of a buy/sell agreement. Others may quit, one may be fired, another may be retired, one could die, still another could become divorced and another could become bankrupt—just to name a few. A comprehensive business consulting strategy should include the owners discussing these future potential triggering events and which ones they want to include specifically in their buy/sell agreement. It is also important that all owners think seriously about these issues because at the time of a buy/sell agreement, no one knows what might happen to him or her or to any other of the Midland-based owners. In other words, no one knows who will be a buyer and who will be a seller. When the owners of an existing Midland enterprise come together to review their buy/sell agreement, they may know that some of the previously mentioned events have already happened in the lives of their fellow Texas business owners.
They will know if the buy/sell agreement operated satisfactory or will trigger it all. For all owners of all enterprises, discussions about the buy/sell agreement reflect a form of future thinking, which is sometimes and perhaps always difficult. As Yogi Berra famously said, “The future is hard to predict. It hadn’t happened yet.” Choices have to be made regarding buy/sell agreements. Ignoring the importance of these documents because it is difficult to think about them at some future point is just a matter of choice. Caprock Business Consulting has over a decade of working with Midland businesses and Midland business owners, and we know that ignoring these issues is not a good choice. Other business consulting strategies include buy/sell agreements, which contain formula pricing provisions. Unfortunately, we haven’t seen a formula yet that can reasonably value a company over time with changing conditions at the subject Midland-based company. This is due to specific issues within the company’s industry and its markets; its local, regional and national economies; and in all market conditions and interest rate environments.
Then, there are what we call business valuation process agreements, which provide a business valuation process to determine the price for your buy/sell agreement. Many agreements have an embedded multiple business appraisal process, which will not be exercised until the occurrence of a triggering event. These agreements too are fought with potential pitfalls. We assert at Caprock Business Consulting that the best price mechanism for most buy/sell agreements of successful closely held family businesses is a single business appraiser process where a business appraiser serving the Midland area is selected by the parties at the outset and provides the business appraisal to determine the agreement’s initial pricing. the Midland business appraiser is then asked to provide reappraisals each year or at least every other year at most to reset the price for the buy/sell agreement. We have long recommended that business owners in the Midland area create a buy/sell agreement as part of their business consulting strategy and name the business appraiser at the time of the agreement. This way, all parties have a voice and can sign off on the selection of the appraiser, no matter how difficult the process of reaching an agreement can be. Once selected, the chosen Midland business appraiser provides a baseline business appraisal for purposes of the agreement. We suggest that the appraisal be rendered in a draft form to all parties to the agreement and that everyone has a reasonable period of time to provide comments and consideration before the report is finalized. Ideally, the selected Midland appraiser will provide annual reevaluations for buy/sell agreement purposes. The single appraiser select now and value now process provides several distinct advantages relative to the other process agreements as part of your business consulting strategy, which include the structure of the process in addition to being defined in the agreement will be known to all parties to the agreement in advance.
The selected Midland business appraiser will be viewed as an independent party with respect to the process. Otherwise he or she would not have been named. At the very least, the suspicion of bias is minimized. The Midland appraiser’s business valuation approaches and methodologies are seen firsthand by the parties before any triggering event occurs. The Midland appraiser’s valuation conclusion is known at the outset of the agreement by all parties and becomes the agreement’s price until the next appraisal or until a triggering event between recurring appraisals occurs. The process is observed at the outset. Therefore, all parties know what will happen when a triggering event happens. The Midland business consultant must interpret the business valuation terms in the agreement is conducted in the initial appraisal. Any lack of clarity in the valuation defining terms, also known as the words on the pages, will be revealed and can be corrected to the parties’ mutual satisfaction. Having provided an initial business valuation opinion, the Midland appraiser must maintain independence with respect to the process and render future valuations consistent with the instructions in the buy/sell agreement. Lastly, because the appraisal process is exercised at least once or on a recurring basis, it should go smoothly when employed at triggering events and be less time consuming and less expensive than other alternatives.
As part of a business owner’s business consulting strategy, he or she must agree on the business valuation issues relevant to their buy sell agreements. However, those agreements must be memorialized by competent legal counsel who should be involved in the discussions to begin with together with the state planning counsel or other financial advisors and qualified business appraisers. Buy/sell agreements, our businesses and legal documents that are created in the context of businesses, valuation and legal requirements. We need to engage in future thinking in order to ensure that our agreements will withstand on only the test of time, but also potential challenges from the internal revenue service.
