Owning a successful business can provide a steady income, a growing net worth and security for families and future generations. Achieving these objectives can also be challenging – especially when there are multiple shareholders in a privately-held company with no market for its stock. In an effort to provide a mechanism for shareholders to sell their stock, many such companies use buy-sell agreements to govern how a shareholder can sell shares to the company or another person.
While a well written buy-sell agreement can smooth the process of transferring stock in a closely-held company, a poorly crafted buy-sell agreement can cause problems when stock transfers do not go as planned.
At a GBQ seminar held in Cincinnati last month, Kelly Noll, Senior Manager in GBQ’s Valuation and Financial Opinions practice, shared insights into the role that buy-sell agreements can play in easing or causing problems in shareholder transitions. Among the observations that Kelly shared were the following:
- Valuation formulas (e.g., the price equals four times EBITDA) sound straightforward when written but often prove to be complex when implemented because the parties dispute how key terms should be defined (e.g., does EBITDA include or exclude one-time or unusual expenses?).
- Buy-sell agreements should address all foreseeable issues. For example, disagreements over discounts for lack of marketability or control can arise if the buy-sell agreement does not clearly address whether these discounts are to be applied.
If you would like to learn how GBQ can assist when buy-sell agreements are being drafted, please contact Kelly Noll. If you need assistance when there is a dispute over a buy-sell agreement, please contact Keith Hock.