Board Converting News, June 7, 2021

Buy-Sell Agreements (CONT’D FROM PAGE 24)



the spouse had been gifted some stock during the mar- riage.” Personal Bankruptcy: A family member with a large por- tion of the company stock runs up excessive credit card debt. When the creditors start to eye his shares as part of a bankruptcy settlement, the business risks losing substan- tial operational control to outside parties. Minority Shareholders: Over the years the business has granted so many corporate shares to children and grand- children that passive shareholders now burden operations. “Problems can arise when people inactive in the business must be consulted to one degree or another about key management decisions,” says Richard R. Spore, an attor- ney with Memphis-based Bass, Berry & Sims ( bassberry. com ). “Passive owners often resist shouldering the risks of change and can have conflicts of interest with those run- ning the enterprise.” Underperforming Personnel: A second-generation fam- ily member who recently joined the company has under- performed to the extent that she must be terminated. The organization risks losing control of her stock. Valuing The Stock Any of the above events, and others like them, can cre- ate hard feelings among family members. They can also disrupt business operations and even result in the loss of managerial control to third parties unless a carefully word- ed buy-sell agreement has set forth appropriate proce- dures. Because most solutions to ownership crises require the recapture or transfer of company stock, any success- ful buy-sell agreement must first specify how corporate shares will be valued. Setting a reasonable price can be difficult, though, when people on either side of the nego- tiating table push for assessment formulas that favor their interests. Those relinquishing stock will naturally seek the highest value possible. The challenge can be especially great when individu- als expect the value of their holdings to be equivalent to publicly traded corporations. “Any business’s selling price will typically be less if the transition is with family members rather than third-party buyers,” says Brownell. “One reason is that external buyers who already have human resourc- es, accounting, legal, and other support departments will not need the redundant ones in a purchased enterprise. That makes the remaining parts of the business more valuable. In contrast, a next generation buyer will need to retain those support departments. The fact that there is more expense involved in keeping them reduces the value of the purchased organization.” The more expansive blend of interests characteristic of a family operation can also create confusion about value, says Brownell. Negotiations will need to aim for a price that represents a win for outgoing and incoming family members, while also leaving sufficient reserves to sustain

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June 7, 2021

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