Transitions Digest

Part 4

Recently I took my nine year old daughter and a carload of her friends to our town’s Volunteer Fireman’s Carnival for an evening of ferris wheels, funnel cakes, and laughter–of course!  It was a Friday night after a long week.  Truly, I would have benefited from a simple dinner at home to unwind from the week.  Sound familiar?  However, I intuitively knew that the laughter of those children was most important and desperately needed…so off we went.
 
As the girls were getting out of the car, they caught sight of the ferris wheel in the distance and the excitement erupted into chaotic squeals, giggles and laughter.  I found myself feeling a bit nervous for their safety as the other cars were moving in and out of the parking spaces nearby.  I regained their attention and reminded them that they promised me to apply the buddy system to keep safe.  All was well…
 
In typical fashion, the Fireman’s Carnival delivered all that was anticipated.  It rained all week, so the grounds were like a mud filled sponge and no amount of hay can fix that.  It always rains during the week the carnival comes to our town.  The children never take notice of the condition of their shoes.  It is all about the laughter. 
 
When I was nine, I loved carnival rides too.  Another mother and I were lamenting the fact that somewhere between the age of 21 and childbirth the ferris wheel went from thrilling to terrifying.  How does that happen?  I think it is just about the same time that we adults forget how to laugh. 
 
Among my successful Entrepreneur clients, I observe that they know how to keep all of their troubles in perspective.  Simply put, they have not forgotten how to laugh!  And given the times we live in, they have been laughing a lot!  Don’t get me wrong, they do not disregard reality or not take their business or life seriously. They keep perspective and know the value of childlike laughter! 
 
After an evening of laughter, it was time to return home with our funnel cakes “to go”.  Dad and big brother were waiting for them.  As we returned to our car, we found ourselves “in trouble”.  No, I am not kidding.  As we approached my car, a Policeman asked me if I was Holly Magister and if that was my car?  Never a good question when posed by a Police Officer!  His cruiser cornered me and my car in and his spotlight was squarely on me!  “Yes, officer.  What is wrong?”  I replied.  My panic-struck heart was pounding and my nine year old began to cry.
 
Truly, my first thought was that someone died and they were trying to find me to deliver the news.  What else could it be?  My daughter thought I was going away in handcuffs forever because that is what she sees on TV.  She never saw a Police Officer that close before–one that knew my name.  They were looking for my mom!
 
The Officer told me that “the white SUV next to me suffered a “door ding” and he was there to investigate the accident.”  “Is this truly necessary?”  I asked the young man who was standing next to his prized mode of transportation.  (Okay, if you have read my earlier blogs, you know that I ask this question a lot!) With no reply to my question, I asked it another way… “Did you have to call the Police?”
 
It turns out that the nine year old’s chorus of squeals, giggles and laughter muffled the sound of the “door ding” that the neighboring SUV suffered several hours earlier.  And the young man felt that he needed the protection of the Police to make certain that justice would be done.  This young man discovered his “door ding” and decided to wait for me to return to my car.  He waited more than two and one half hours! 
 
The Police Officer informed me that it was his “job to determine if the door ding was inflicted with malicious intent or by accident.”  I replied, “I do not know any nine year old that would have malicious intent of any kind and I am grateful for that!”  He was not pleased with my reply and further informed me that he “did not want this to get ugly”.  Regardless of the absurd situation, I decided to save my sharp tongue and sarcastic sense of humor so the Officer did not feel compelled to take me away!  Besides, the funnel cakes were getting cold.
 
Today, I learned that the body shop did not consider the SUV’s injury to be a “door ding”, instead it was a “paint transfer”.  And it would take only $554.73 to make it go away!
 
The white paint from the SUV that was “transferred” onto my blue car was undetectable after a $6.00 wishy wash at the gas station.  What a bargain!  But here is the best part…after my car was washed, the shine revealed no less than 11 “door dings”.  Real ones! 
 
As I share this story with you, and more recently my family, I am reminded of the numerous “door dings” we endure as Entrepreneurs, parents, and humans for that matter!   And I believe that it is the endurance and perspective gained along the way, not the removal of the door dings, that make the difference!  To know that the door ding the white SUV suffered was because of a child’s excitement and laughter put a smile on my face.  Are you smiling?
 
As for my door dings, all eleven of them, they are not going away!  They serve to remind me daily what really matters… endure, keep perspective and remember to laugh every chance you have!
 
Let us know your insights by commenting on our blog post below.  

Holly A. Magister, CPA, CFP
Enterprise Transitions, LLP

Read Previous Articles in the Series:

Part1:Troubled Waters Part 1
Part2: Troubled Waters Part 2
Part3: Truly Necessary in Troubled Waters

Posted on September 15th, 2009 under Building Value, Business Growth, Economy, Entrepreneurship, Exit Planning. Tags: Entrepreneur, Entrepreneurship, successfull entrepreneur. Comments: 3

By Holly A. Magister, CPA, CFP®

Do you know what is truly necessary?
 
With the multiple changes in the marketplace over the past six months or so, many Entrepreneurs find themselves overwhelmed.  They are reacting to client demands, changing vendor and employee relationships, increasing costs, and dwindling resources–financial, human and even their own energy.  They go home at the end of the day not truly knowing if they made any progress.  And that day was likely a 12-to-15 hour day! 
 
Does this sound familiar?  If so, know that you are in good company!
 
As you endure the chaos, it is impossible to have the insight to recognize what is truly necessary and what is distracting you from your best work and opportunities.  Unless, you stop and make a point of asking yourself “is this truly necessary?”
 
In many cases, Entrepreneurs spend inordinate amounts of time dealing with the matters that really mean the least to their future success.  And by doing this, they are expediting their failure.  Do you fear failure?
 
To ensure success, you must take time to reflect on matters that are critical and clearly understand and focus on the matters that are truly necessary every day.  As far as those matters that are not truly necessary, stop addressing them now! 
 
When you recognize how distracting those unnecessary matters are, you will quickly recognize the numerous expenses you will be able to eliminate when you let go of the unnecessary.  That is the good part!   When you eliminate the unnecessary, your life is simplified, some (maybe many) of your expenses are eliminated and your profit increases!  In my experience, “eliminating the unnecessary” has the potential to transform your business, your outlook as an Entrepreneur, and you.
 
Over the past few weeks, I have been sharing my insights through this blog series about how successful entrepreneurs are navigating the troubled waters we all share.  Successful Entrepreneurs are courageous as they consider their numerous options, they utilize their resources and eliminate the unnecessary.  And without exception, they understand the importance of the last principle…they find the humor in the situation.  In very simple terms, they laugh.  They apply this principle often!
 
I will share more about humor in my next blog posting.  In the meantime, stop and ask yourself “what am I doing today that is not truly necessary?”  Let us know your insights by commenting here.

Read the Previous Articles in this Series

Troubled Waters Part 1
Troubled Waters Part 2

Posted on May 20th, 2009 under Building Value, Business Growth, Economy, Exit Planning. Tags: Entrepreneur, Increasing Costs, Profit, Profitability, Simplify, Successful Entrepreneur. Comments: 1

By Holly A. Magister, CPA, CFP®

As you navigate these troubled waters, what resources do you draw upon?

Many good-intentioned entrepreneurs confuse being courageous (the subject of my last blog) with the notion that during difficult times they must become Lone Rangers in order to survive.  What I have observed is the truly successful entrepreneurs do the exact opposite.  They instinctively recognize the value of their resources and know exactly when to draw upon them for help.  Instead of retreating to their early days of entrepreneurship, where they were “rugged individualists” by necessity, they call upon the people, companies, and other resources from the past that have consistently provided them with “best of their breed” performances.  And if for some reason, they do not have access to such a resource in their time of need, they find them.  Someway, somehow they find them.
 
As your business is occupying its position in the marketplace today, the world is changing.  Really, really changing.  Stop for a minute and ask yourself the following question: “What is different today in my marketplace than one year ago?”  If you cannot list at least three differences, your head is buried in the sand.  And if that is the case, you have permission to stop reading this now.
 
With your list of three (or more) differences, you have the place from which you should start to work.  You must deal with these differences NOW to survive today AND thrive in the future.  This is where those valuable resources (old and new) become critical.
 
So how do you know if the resources you have drawn upon in the past, or are considering for your current and future needs, are truly “resourceful”?  Or do they simply go through the motions?  I recommend asking yourself if those resources have delivered, kept promises, or maybe even exceeded your expectations. Are they creative and capable of providing a point of view that may not be popular?  Is their advice, service and attitude one that makes you feel as if they truly are concerned about YOU?  The truly valuable resources in your world should not be afraid to make changes to the way they deliver their products and services to you.  They should be flexible, open-minded and capable of adapting to the troubled waters we are all sharing.  Technology and the knowledge base is changing and growing rapidly.   Your resources should be adopting these advances and excited to share with you the benefits from doing so.
 
One of my favorite quotes of Warren Buffett is “You never are hit by the bus that you are looking at.”  How so true, on so many levels!
 
The successful entrepreneurs that I work with have been run over by more than a few busses.  The difference between the successful ones and the rest is the attitude they carry as they react to the situation and the resources they have to draw from to help them.
 
Before you pull out your PDA to call upon your resources, we need to make certain you are applying them to the things that really matter.  And that leads me to the subject of my next blog–principal number three–Eliminate the Unnecessary.  In the meantime, think about your resources…Are they resourceful?
 
Read Trouble Waters Part 1

Posted on May 8th, 2009 under Building Value, Business Growth, Economy. Tags: Building Valuable Businesses, Business Growth, Business Resources, Economy, Entrepreneur, Growth Resources, Successful Entrepreneur, Warren Buffett. Comments: 1

By Holly A. Magister, CPA, CFP®

The first quarter of 2009 was brutal on virtually all fronts. During my twenty-five years of practice working with Entrepreneurs, I have never witnessed more chaos in the marketplace. Never.

Clients, vendors, employees and other resources that once were reliable relationships, a “known quantity” so to speak, have made moves that no one would have predicted–even 90 days ago. So, here you are…the Entrepreneur without a roadmap. What is one to do?

I believe that as an Entrepreneur you must apply four principles as you navigate these troubled waters…Find Courage, Draw from your Resources, Eliminate the Unnecessary, and Look for the Humor. Without doubt, looking for the humor may be the hardest principle to apply because nothing appears to be very funny at this point. We will get to that principle, however today’s blog is intended to highlight the first principle Courage.

In one of my recent blogs, I shared my belief that it is critical to Make No Assumptions. The first principal “Finding Courage” is necessary if you plan to “Make No Assumptions”. Not all Entrepreneurs are capable of making no assumptions and frankly the real winners are the ones who have enormous amounts of courage!

What does courage look like? In my travels, I have found numerous courageous Entrepreneurs. They know they must be brutally honest with people they love. Sometimes they must remove an employee that simply is not (and has not been) productive. Often they truly love that employee. I hear comments like “This is really tough, he is my son’s best friend since grade school…We all went to their daughter’s wedding.” But the truth is this employee is not cutting it and he is the bad apple in the barrel. You know who they are. You do not have to think about it for even a minute. Nonetheless, that bad apple is spoiling your barrel!

Courageous Entrepreneurs also know they are the driver of their business. It was their dream and their vision that drove them to start the business and it their passion that drives them to navigate these troubled waters today. They know they must follow their gut about clients, vendors, employees, and their other resources as they move forward. Yes, the input from others is important. However, the courageous entrepreneur knows deep down inside the people whom are valuable to them and their business.

One of my mentors is recovering from brain cancer surgery and continues to work with me as my coach. His incredible courage teaches me. As he was returning to his work with me only three months post-surgery, he wrote the following note and I want to share it with you: “Find the resources, make the time, come dressed to play, and be ready to win. If a fifty-six-year-old guy with a brain tumor thinks it’s important enough to dress up and come play, you should just come to see if I can still throw the ball.” He is the epitome of courage and one of my most precious Resources.

I will cover principal number two…Draw from your Resources…on my next blog. Until then, I know you will be courageous in those troubled waters.

Read Troubled Waters - Part 2

Posted on April 13th, 2009 under Building Value, Business Growth, Economy. Tags: Business Resources, Economy, Employees, Entrepreneur, Entrepreneurs. Comments: 1

by Holly A. Magister, CPA, CFP®

Have you notice lately, that what used to be “tried and true” is no longer?  It seems everywhere I turn, I am observing changes– major changes in some cases.  While this constant state of change causes many people stress, during such phases of major change, we grow the most.

Many complain about the stock market mess, unemployment applications on the increase, bad mortgages and foreclosures,  …I could go on and on…but I will spare you.  The truly resourceful people among us are fully engaged by the opportunities because they are making no assumptions.  And from only that position, they are clearing seeing opportunities.

Joseph A. Schumpeter, an Economist defined phases of massive change, such as the one we are experiencing,  followed by innovation as “Creative Destruction”.  I find his choice of words for what we are experiencing instructive.  In order for our economics to improve, all of our assumptions must be “destroyed” in order for us to be “creative”. 

Are you experiencing massive changes in your life and the world around you?  If so, then it is necessary to let go of those assumptions for progress to be made.

Every day I have the pleasure of working with some of the most wonderful, resourceful Entrepreneurs that I could hope for.  And every one of them is excited about the endless opportunities they are embracing every day.  Every one of them, without exception.  These Entrepreneurs do not need a government bailout or economic stimulus package to improve their situation.

They make no assumptions and find opportunities abound.

If the changes around you are overwhelming, stop and ask yourself “what are the assumptions that I am holding onto that are preventing me from finding the opportunities for my future growth?”  Be honest with yourself and you just may find yourself as excited about your future as I am.

Posted on February 6th, 2009 under Business Growth, Economy. Tags: Business opportunities, creative destruction, Entrepreneur. Comments: None

The 30,000 Mile Checklist

In the prior two issues of this newsletter, we’ve looked at several key elements of your buy-sell agreement and the transfer events that can trigger a buyout. Today, we look at all the types of changes (in you, your partners, your company, your finances and your industry) that can transform that vigorous buy-sell you created years ago into a lumbering, but potentially dangerous, dinosaur. In this issue you’ll also find a checklist that will help you assess the viability of your buy-sell agreement.

PEOPLE CHANGE

Shareholders are living, breathing creatures. In addition to all the “bad things” (or transfer events) that we discussed in previous issues, shareholders will age. As they do, they may adjust how much they want to work or what goals they want to work toward. If shareholders are all of a common age, they may share these changes or they may not. If one shareholder is older than one or more of the others, the commitment to work long hours or the long-term ownership goals of the older and younger shareholder can diverge. Should that happen, the only effective recourse may well lie in the provisions of a well drafted, comprehensive and current buy-sell agreement.

COMPANIES CHANGE

The most common change in the life of a successful business is its increase in value. When the company isn’t worth much, shareholders may be able to buy each other out if certain events occur. As the company becomes more valuable, however, shareholders cannot put together the resources necessary to cash each other out.Also, over time, the ownership of companies changes as new owners buy in and older ones sell out and retire. As these changes occur, the ownership proportions can change in ways not intended or planned by the majority shareholders. The buy-sell agreement can respond by allowing ownership, but not voting control, to shift to the younger, incoming generation of owners.

INDUSTRIES CHANGE

Like it or not, the industries we are in affect the value of our companies. If we’re in a niche or “hot” industry, buyers will pay more for our companies and values reflect that demand. If there is a great deal of industry consolidation going on, the value of your company will reflect that. Similarly, industries go through boom and bust cycles and if the company is enduring the bust part of the cycle, its value reflects that downward pressure as well. Buy-sell agreements can be drafted to reflect not only rapid changes in value, but also corresponding changes in the terms (length of buyout, amount of down payment, mandatory vs. optional purchase, etc.) of any purchase. This tends to prevent one owner from “gaming” the buy-sell agreement by selling out when value peaks.

BUYOUT REQUIREMENTS CHANGE

When you created your buy-sell agreement, you made decisions about whether particular events would trigger an optional or a mandatory buy out. You made those decisions based on then current factors. As the foundation for those decisions may have changed so too do your preferences. For example, you now may prefer that a child or a key employee acquires your ownership when you retire or die, rather than the other co-owner.

THE ABILITY TO SELL OUT CHANGES

When your company was worth very little, it would have been highly unlikely for an unrelated third party to approach you with a lucrative offer to buy. Now that your company may be more valuable, however, the possibility that a third party would make an offer is a real possibility. Does your buy-sell agreement adequately address this? What if one owner wants to sell and the other doesn’t? Does it make a difference whether you are the owner who wants to sell or the owner who doesn’t want to sell? Given all the moving parts, it makes sense to review your buy-sell agreement at least every year. The following checklist is designed to give you and your advisors a snapshot of your buy-sell agreement. The purpose is to help you identify those areas that should be updated for all the reasons discussed here.

Buy-Sell Transfer Event Checklist

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on October 15th, 2008 under Exit Planning, Exit Planning Digest. Tags: 30000 mile checklist, bi-monthly newsletter, business brokers, business changes, business for sale, business planning, buy-sell agreement, buy-sell agreements, buy-sell transfer, buyout, companies change, Enterprise Transitions, Entrepreneur, Entrepreneurs, Entreprenuer, Entreprenuers, Exit Panning Review, Exit Planning, Exit Planning Review: “Should I Sell My Business Now?, industries change, part two, retire, retirement, shareholder, shareholders, Strategic Exit Plan, Strategic Exit Planning, update. Comments: None

 The Exit Planning Review™ Bi-Monthly Newsletter

In the previous issue of The Exit Planning Review™, we discussed what a buy-sell agreement is and why you should dust it off, take a second look at it, and call your advisors to update it.If you just aren’t convinced that setting up that meeting is all that important, in this issue, we’ll look at the events that can (and do) crop up in the life of a business and that can be handled by a carefully designed, frequently updated buy-sell agreement. Once you see how one agreement can impartially and fairly treat all parties when bad things happen, we think you’ll make that call.

TRANSFER EVENTS

Buy-sell agreements can be designed to handle the unhappiness that can arise when any of the following events happen to the shareholders of a closely held company:

• Death of a shareholder
• Disability of a shareholder
• Divorce of a shareholder
• Bankruptcy of a shareholder
• Sale of part or all of the company to a third party
• Retirement of a shareholder
• Involuntary termination of a shareholder
• Business dispute among shareholders

You probably have no trouble imagining how most of these events (the death or disability of a shareholder, for example) could cripple your company or your family if left unaddressed. But some events, like the involuntary termination of a shareholder, are harder to grasp.

Rarely do owners anticipate that one day they might have to terminate the services of another shareholder. If they can imagine that scenario, it is rarer still that they can imagine the thorny problems that will arise. Is the terminated shareholder required to sell back his stock? Is the remaining shareholder or the company required to purchase it? In a divorce scenario (especially in a community property state) do you run the risk of ending up with your co-owner’s ex-spouse as a new co-owner?

Let’s look at a few all-too-common problems that well-written buy-sell agreement can solve.

Sale of Part or All of Company to a Third Party

You receive a call from a legitimate representative of a deep-pocketed Private Equity Group who has identified your company as an acquisition candidate. He makes an initial offer that would guarantee your family’s financial security for life. Imagine your surprise as your 25 percent co-owner responds to your announcement, “Thanks, but no thanks. I’m just getting started and think we can take this company to the next level ourselves!” You call the PEG back to offer your stock for sale, but the PEG (like almost every third party owner) isn’t interested in buying a part of your company. It is an all or nothing offer. Since your buy-sell agreement doesn’t address this issue, you hang up and return to work.

A well-crafted buy-sell agreement can stipulate that when a third party makes an offer to buy a company’s stock, the other shareholders must match that offer or must sell their shares to that third party.

Firing a Shareholder

Twenty years ago Ned, Kathy and Jim left a common employer and started their company. The three equal shareholders knew exactly what they’d do differently and agreed on how hard they’d all work to reach their common goals. During the last five years however, Jim’s behavior was becoming unpredictable. He missed important customer meetings, ignored his department’s performance and finally, was arrested for soliciting an undercover policewoman in a well-publicized sting. In an attempt to calm vendors and customers and to restore employee morale, Ned and Kathy asked Jim to resign. He refused. They reluctantly told Jim that he’d have to leave and that they’d purchase his stock at the value agreed upon in the buy-sell agreement. Jim pointed out to his co-owners that their buy-sell agreement did not mention the involuntary “retirement” of a shareholder and refused to sell his shares.

A carefully considered buy-sell agreement can stipulate not only that a fired shareholder must sell his or her shares for the agreed upon value, but also that the remaining shareholders must pay for that stock.

Divorce of a Shareholder

When Mike and Patrick went into business 15 years ago, they agreed on everything — except women. Neither could imagine what the other one saw in the other’s wife, but had managed the situation by maintaining a polite distance.

One Saturday night, Mike called Patrick to ask if he could stay at Patrick’s house because his wife had kicked him out. The following week, Mike was served with divorce papers and within days, Mike’s attorney scheduled a meeting with both men. Patrick’s initial curiosity about why he was involved turned to anger when the attorney told them that Mike’s wife wanted, and, in their community property state had a right to, half of Mike’s share of the company. If the three of them couldn’t run the company together, Patrick would have to buy both of them out and Mike’s wife had an especially unrealistic idea of what her share was worth.

Mike and Patrick turned to their buy-sell agreement hoping they’d thought to plan for this event. They had not. Their agreement did not include a divorce provision.

We are happy to send you information about any transfer events that your buy-sell should cover. In the next issue, we’ll talk about how changes in your company can turn the buy-sell decisions you made in the past into less-than desirable solutions today.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on October 6th, 2008 under Exit Planning, Exit Planning Digest, Uncategorized. Tags: "Does Your Buy-Sell Cover Everything it Should?", bi-monthly newsletter, business brokers, business for sale, business planning, buy-sell agreements, Enterprise Transitions, Entrepreneur, Entrepreneurs, Entreprenuer, Entreprenuers, Exit Panning Review, Exit Planning, Exit Planning Review: “Should I Sell My Business Now?, part two, retire, retirement, shareholder, Strategic Exit Plan, Strategic Exit Planning. Comments: 2

This may be quite contrary to what one may think when all you hear is doom and gloom through the media about the financial mess we are in. Mess, yes indeed, we have a mess on our hands! However, I truly believe that people in America are the most resilient people on earth. And the most resilient people I know are Entrepreneurs. They have built our country and will be the greatest contributors to the solution to the mess we are in.

Frankly, what Wall Street, Main Street, and Congress find most concerning is what the lack of credit available to Entrepreneurs will do to our economy. Entrepreneurs are Business Owners that create and maintain more jobs in America than any other category of employer. Without affordable and accessible credit, Entrepreneurs will not order inventory. Likewise, rent, utilities, and payrolls cannot be paid. There is nothing more important to an Entrepreneur than cash provided through the availability of credit. And there is nothing more critical to the American economy than credit.

What I find ironic about the financial mess that we are in is that the mess was not created by Entrepreneurs while the lack of credit available to Entrepreneurs is bringing the American economy to its knees. The banking industry was incentivized to write bad mortgage loans and indeed they did so for more than a decade. Entrepreneurs did not create this mess!

Entrepreneurs are innately capable to deal with messes. They do it every day and they do it very well! The Entrepreneurs that I have the pleasure to work with have already developed their “Plan B and Plan C”. Many of them do it on the back of an envelope; many do it when they are not sleeping at three o’clock in the morning. Nothing pretty, nonetheless, they have a plan.

We are living at a time that we will remember and talk about for decades. I cannot wait to see how the most resourceful, resilient people in America clean up this mess–the Entrepreneur.

Posted on October 1st, 2008 under Business Growth, Economy. Tags: affordable credit, American economy, Blog, credit, credit solution, Entrepreneur, Entrepreneurs, Entreprenuer, Entreprenuers, Financial, financial crisis, Financial Mess, Holly A. Magister CPA CFP®. Comments: None

The Exit Planning Review™ Bi-Monthly Newsletter

The business continuity agreement is the single most important document that the owners of a closely held business will ever sign. This agreement (also known as a buy-and-sell or buy-sell agreement) controls the transfer of ownership when certain events occur. These events include: the death or disability of a shareholder, an involuntary termination or retirement of a shareholder and even (yes they do happen) disputes among owners.

In this four-part series of articles about buy-sell agreements, we assume that, like most successful co-owned companies, your company has, in place, a buy-sell agreement. In our experience, however, many, if not most, of these agreements do not reflect either the current circumstances of the business or the owners’ current wishes regarding business continuity. When that is the case, an outdated buy-sell agreement may cause more problems than having no agreement at all! Let’s examine why.Your first buy-sell agreement (and maybe the one you still have) was likely created when your business was in its infancy, had little value and even less complexity.

The most significant continuity issue contemplated was the death of a shareholder. If one owner wanted to leave, the buyout, if any, would cost little. In fact, the most reasonable response might have been to liquidate the business. A comprehensive buy-sell agreement addressing all possible events that can trigger a sale and purchase of ownership was not only unnecessary, the legal fees to create such an agreement may have exceeded the value of your company!

But you, your business, and your co-owner(s) have likely changed mightily since those early days. Has your buy-sell agreement kept up?This series of articles explores the reasons to review and to revise the buy-sell agreement, what events a buy-sell can and should cover and finally, how valuation can and should work in these agreements.So, take a look at a copy of your buy-sell agreement (it’s probably where you keep those other “important” documents — in the bottom drawer of your desk), and ask yourself a few questions:

1.  When was this document last reviewed? If the answer is never or more than two years ago, it needs to be reviewed now. In the early years of the business it probably wasn’t vital to review the buy-sell every year or so because business conditions and value and shareholder aspirations (both personal and business) didn’t change significantly. But today, change is the norm:

• business value may increase or decrease more in one year than the total business value of your company in its start up years;
• owners inch closer to retirement or a desire to sell the company;
• or young co-owners who worked as a group during the early years now have different outlooks, different work ethics, and perhaps different health situations.

In short, your buy-sell agreement now needs to address all of the issues that could trigger a transfer of ownership. The next issue of this newsletter discusses seven trigger events successful owners should consider including in their buy-sell agreements.

2. Would I rather make decisions about how to cash out a departing shareholder now or when tempers are flaring? Decisions about how to put out a fire before there’s even a whiff of smoke in the air are hard enough to make. Attempting to find solutions that are fair to all parties when emotions run high is nearly impossible. In the company’s formative years, it wasn’t critical to consider how a lifetime buyout would be structured and valued because the value was minimal. Today it is and unless your buy-sell agreement fully addresses how to cash out departing shareholders, it becomes a ticking time bomb.

To help you prepare for your meeting with your advisors, let’s review a few key items in your buy-sell agreement:

1. Who is included in the Agreement? Who has voting control? Are there any changes in either who is included or in the proportions of ownership since you last reviewed the document?
2. What events are covered in the Agreement? (Look for a comprehensive list in the next issue of The Exit Planning Review™ )
3. Transfer events (death, disability, business disputes, etc.) trigger either mandatory or optional buyouts. The choices you made about what event triggers mandatory buyouts vs. which trigger optional buyouts may no longer be the best choices. As companies grow in value (and have more cash on hand) shareholders more often choose the mandatory buyout option.
4. How does your buy-sell agreement determine how the amount of future buyouts will be calculated? In the third part of this series, we’ll look at several ways to establish value and which methods work best.
5. Finally, look at how you’ve decided to fund particular types of buyouts. If, for example, there is a life insurance funding a buyout of a deceased shareholder, is it in a sufficient amount? Is the policy owned by the proper party? Are the beneficiary designations correct? If a lifetime buyout of an owner is expected, how can that buyout best be (at least partially) pre-funded and designed to minimize overall taxes?

This quick list should give you plenty to discuss at your next meeting with your advisors. If you aren’t convinced you should schedule that meeting, our next issue will summarize some of the events that can and do occur in the life of any business. If your buy-sell agreement does not cover these events, you and your company may be more vulnerable than you ever imagined.

Subsequent issues of The Exit Planning Digest discuss all aspects of Exit Planning. The provider of this Newsletter (Holly Magister, CPA, CFP®) offers you unbiased information about what you may need to know. Subscribe to our free Exit Planning educational newsletter to learn more about how to grow and/or plan for your business exit.

Posted on September 15th, 2008 under Exit Planning, Exit Planning Digest. Tags: "Is Your Buy-Sell Agreement Current?", bi-monthly newsletter, business brokers, business for sale, business planning, Enterprise Transitions, Entrepreneur, Entrepreneurs, Entreprenuer, Entreprenuers, Exit Panning Review, Exit Planning, Exit Planning Review: "Is Your Buy-Sell Agreement Curr, part two, retire, retirement, Strategic Exit Plan, Strategic Exit Planning. Comments: None