Why Buy and Sell Agreements Matter to Business Owners
If you’re in business with a partner, you already know that your partnership – like your company – can change over time. If your initial shareholder agreement didn’t include Buy and Sell provisions, it’s essential to add them.
A Buy and Sell agreement is a legally binding contract that stipulates how a partner’s share of a business will be reassigned if that partner dies or otherwise leaves the business. It may also cover what happens if a partner becomes disabled or unable to perform business functions, gets divorced, files for personal bankruptcy, or experiences other significant life events that may impact the partnership.
“Generally, the Buy and Sell agreement prevents the remaining partner(s) from being forced into being in business with family members: surviving children, or a disgruntled ex-spouse,” says Kathy Cold, an attorney specializing in corporate law in the Jacksonville office of Lippes Mathias Wexler Friedman. Cold recommends that every partnership begins with an exit strategy in mind.
“This year in particular,” she says, “has shown us that circumstances, both personal and in business, can change in an instant. It’s a really good idea for partners to sit down early to discuss what happens when one of them leaves the business.”
In the case of a partner’s death, some of the cost of the buyout may be covered by a life insurance policy the company pays for. Any other exit must be part of a negotiated agreement, which is best done well in advance. Cold says, “If the partners are having issues with each other, it may be very difficult to negotiate and to decide how to value the business. This kind of agreement is like a prenup; it’s much easier to come to terms at the beginning of the partnership when both partners are eager to come to terms and are optimistic about the partnership.”
The Buy/Sell Agreement should have a provision that covers how the business will be valued after events that might trigger a buyout. A formula valuation can be used, or the parties can simply agree on a value, with the idea that it will be revisited each year. However, the agreement should provide that if too much time goes by without an actual redetermination of value, that an appraisal will be made so that the valuation will be fair.
In addition to covering the “Three Ds” (death, disability, and divorce), the Buy and Sell agreement also defines what happens when a partner simply decides to leave the business, including the timeframe the remaining partners have to buy them out. “When you don’t have any written contract that covers what happens when one partner wants out, you can run into real problems,’ says Cold. The exiting partner doesn’t have an obligation to sell, and the remaining partner doesn’t have to buy them out.”
A corporate law attorney is invaluable when you’re working out these issues. She’ll explain your options and help you understand the implications of the choices you make. An objective third party helps keep emotions out of the negotiations and makes sure the agreement is binding and equitable.
Gwen Griggs, a corporate attorney and founder of ADVOS Strategy and Law, says Buy and Sell provisions are a critical part of an overall governing document for an LLC or corporation. “They protect each partner,” she says. “Since you don’t know in advance which partner may leave the company first, or under what circumstances, you’ll benefit from a detailed and thoughtful document that covers a wide range of possibilities, including a mechanism to determine how to value each party’s interests. Restrictive covenants are another example, designed to prevent problems that may come up when a partner leaves, such as protecting Intellectual Property, starting a competing company, or soliciting away employees, customers, or vendor relationships.”
Another important function of the Buy and Sell agreement is to define what happens when the majority partner(s) want to sell. “You’ll need to be clear about what the implications are for the minority partner(s),” she says. So-called “Drag Along” rights require the minority partners to sell their shares when the majority decides to sell, so buyers can have complete control of the company. (“Tag Along” rights give minority shareholders the option, but not the obligation, to sell.)
Griggs says you’ll also want to define what happens when a partner or employee with shares is fired. Depending on the position, the employment agreement may require the employee to sell the shares back to the company.
If you think things can get complicated between business partners, imagine the same scenario within a family-owned company, many of which tend to operate without formal agreements. “This is where the Buy and Sell agreement becomes essential,” says Cold. “You may have some family members who are working in the business, and others who aren’t, but stand to inherit or expect to influence decisions. You may have siblings with equal roles and no clear senior partner to make decisions. Without a good contract and good advice, things can fall apart quickly.”
Drafting a detailed Buy and Sell agreement within your original shareholder’s agreement may take time, but it’s time well spent. Gwen Griggs says, “Partnerships are very much like marriages; clarity and certainty make them both stronger.”
About the author:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
Read MoreHow Does Technology Make Your Business Attractive to Buyers?
When buyers have questions, show them the data
If you think selling a business is scary, try being the buyer. It’s the buyer that has the burden of trying to figure out if the seller’s sales numbers are inflated and what other answers are an exaggeration of the truth. Nobody wants to be taken advantage of.
It’s because of this, buyers enter the relationship understandably skeptical, and it’s up to the seller to quickly earn their trust and get to the closing table.
When a buyer is doing their due diligence, expect them to ask questions like:
- Can you show me year over year revenues by month?
- What is the average sale?
- How many active customers do you communicate with?
- What is your cost of goods sold?
For some sellers, those questions would be met with a blank stare because they just don’t have the answers. That response doesn’t give the buyer confidence that they are buying a solid business with predictable revenues. “Uncertainty is the enemy of any business deal. If the buyer can’t have their questions answered quickly, they frequently have second thoughts and look to get out of the deal altogether. At worst, they are not willing to pay top dollar. My #1 piece of advice to sellers is to know your numbers.” That’s the message from Tim Bellon, business broker with VR Business Brokers of Tampa Bay.
Startup businesses almost always start on a shoestring budget and rely on revenues to fund future growth. As a result, some are slow to adopt modern technology to run day-to-day operations. As these businesses mature, they should consider adding tools to not only operate at peak efficiency but make them more marketable when it comes time to sell the business?
What technology should you use? Bellon recommends these basics at a minimum:
Accounting
Quickbooks or Freshbooks are two good choices to keep track of vital accounting data. With these tools, you can see a dashboard with real-time data like who owes you money and how much, sales performance, expenses, and profit and loss graphs. It will save you hundreds of hours and will be more accurate. The pricing starts at $7.50 per month.
Customer Relationship Management (CRM)
A CRM should be the backbone of your sales activity efforts. It’s a program that tells you who to call when to do it and why. It keeps track of your relationship with the customer so that you can maintain consistency and continuity. Advanced CRM’s will automate marketing too by generating emails triggered by customer activity. Understand where your leads are coming from and how long it takes to close a sale. Any CRM can grow with you. Popular tools include Salesforce, Hubspot, Sugar, and Insightly. Many platforms operate on a freemium model, meaning you only pay for desired features and number of contacts.
Team Collaboration
If you have team members working remotely, you need a collaboration tool to keep projects moving forward. Handle unlimited details from dozens of employees through Dropbox, Slack, Asana,and Monday. Never again be left wondering about the progress of a project or where it might be stalled. You may be able to suffice with the free versions of these tools, but if you opt to pay for advanced capabilities, the cost is a nominal $6-8 per month per user.
Telephone Communications
There is no excuse for poor handling of telephone communications. It’s become standard that Voice Over Internet Protocol (VOIP) providers can allow you to:
- Track overall call volume
- Listen to calls for training purposes
- Seamlessly transfer calls to cellphones
Bellon likes Grasshopper or Phone for smaller businesses, but ask your cell carrier what enterprise options they have if these don’t fit your needs. At just $12-$26 per month, you will have no problem seeing the return on investment.
What do all of these tools have in common? They’re incredibly affordable, safe, and secure in the cloud. Used together they will enable your business to scale and as an added benefit, give your one-day buyer piece of mind that your business was run by a true professional with an eye on growing the strongest business possible.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
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Selling Your Business? Read Your Lease
If you have the goal of selling your business, dust off your lease agreement and give it another look.
Did you know the language in your lease can prevent you from selling your business? If that’s news to you, you’re not alone. It’s alarming how little attention business owners give to the leases they sign. Many times, it can come back to haunt them years later. Business broker Tim Bellon is quick to defend the business owner. “Should they have the lease reviewed by an attorney? Absolutely, but when a business is in startup mode, choosing to save a few hundred dollars by the entrepreneur doing it themselves is a choice many make.
“Negotiation with a landlord, especially a large group, is like “bringing a knife to a gunfight,” Bellon colorfully explains. Here’s why.
Landlords write leases to protect their own interests. If the business owner defaults, there is most likely a clause/section of the lease where the business owner is a personal guarantor of the lease. Many business owners are not aware of this. If you sell the business, this personal guarantee likely will remain in place and the landlord could hold you in default if the new business owner were to quit making rent payments. If you want to assign the lease to a new owner, in almost all cases, you have to get the landlord’s permission and approval.
All of this can become a problem if the business owner doesn’t leave some room to maneuver. “I advise my clients to assume you are going to sell the business, even if that isn’t in the short term plans. A health event or other family matter can change the well-intended plans quickly,” Bellon explains.
An inflexible lease can kill the sale of your business, even if you have a willing buyer. Here are some of the pitfalls Bellon looks for in client leases:
At least 10 years left
If your buyer is obtaining Small Business Administration (SBA) funding, the bank will usually require that there are at least 10 years left on the lease. This is because they want the lease to match the amortization of the loan. It’s ok if 10 years can come from multiple extension options.
Transferability
You want some options to transfer the lease. This can become more complicated if you had the landlord make tenant improvements that were cost amortized through the remaining years of the lease. In the most iron-clad lease agreements, transferability is prohibited altogether.
Personal guarantee
Most landlords will demand a personal guarantee on the lease. What some tenants don’t realize is that if they were to transfer the existing lease to the new owner, the original signer will remain as a personal guarantor. This means that you’re personally exposed if the new buyer of the business defaults.
The landlord has the final say
If you secure a qualified buyer and every other detail has been worked out to buy your business, you still need the landlord’s approval to transfer/assign the lease. Because there is a new party responsible, the landlord will require a credit check, personal financial statement, and other sensitive information needed to complete the transfer.
If you’re thinking about selling your business, Bellon’s advice is to pull out the lease now and have it professionally reviewed. This is part of his process when he creates a marketing plan to sell businesses. “I make sure we can work with the lease even before we list the company. If we need to renegotiate with the landlord, I want to start that process early.”
“The two things most likely to kill a deal to sell a business are the accuracy of books and conditions of the lease.”
Bellon’s parting advice is don’t forget about your lease, and don’t go it alone. Seasoned brokers are trained to help you navigate complex business sales.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
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Have the Answers to These Questions When Selling Your Business
When a business owner connects with a buyer, there is an information exchange that happens between the parties that give each the confidence to take the next step in the buying process. And keep the deal moving toward closing.
For the seller, they want to have the confidence the buyer can obtain needed financing and has the creditworthiness to spend needed time and experience with them.
For the buyer, they need to get a level of comfort with the financial performance of the company- and sadly, thats when negotiations frequently fall apart.
Respected business broker, Tim Bellon says that many times it’s because of sloppy record-keeping. “The seller may have a healthy business, but co-mingling personal expenses and failing to document can make the company look not as profitable as it should be.” That affects the offer price and in some cases the willingness of banks to finance the deal.
Keeping good financial records is hardly new advice, but Bellon suggests going one step further to quickly earn buyer confidence and show them they are about to make a good decision.
Have a Dashboard
Just like you have a dashboard in your car that displays critical information like speed, warning lights, fuel mileage, and other data, your business dashboard also displays key performance indicators (KPI’s) that indicate business health.
Some examples of data to have at your fingertips are
- Profit and Loss for the year, month and quarter
- Number of new contracts signed per period
- Profit margin
- Leads received
- Accounts receivable
- Hours billed
- Customer retention
- Cost to acquire a customer
If it sounds like a lot of work, it doesn’t have to be. Most out of the box accounting and Customer Relationship Management (CRM) software programs have some level of reporting built into their platforms. You just need to enable them and data is updated automatically with other inputs. Quickbooks, Freshbooks, Xero, Hubspot, Salesforce, and others all have this capability.
Bellon offers his support, “I’m not an expert in software tools, but I do have a network of people that are. If someone needs help setting this up, I can make referrals”
Bellon admits in the real world, it’s rare that a business owner has all this data readily available, but that doesn’t mean you shouldn’t. “At the core of every business deal is trust and credibility. Having quick access and being able to speak about your numbers intelligently instantly makes you stand out and increases the chances of you getting to the closing table.”
It’s a little know fact in the industry that up to 70% of businesses listed are NEVER sold. Why? There are multiple reasons, but poor data is among the most common. It certainly takes hard work to position your company for sale and brokers like Bellon are experts in packaging business so that it looks attractive to buyers.
“My job is to package a company so that we effectively communicate the value proposition. When good data and effective marketing comes together, the result oftentimes creates multiple offers from competing buyers. That’s the dream situation because every seller wants a bidding war to drive their sale price up.” While that doesn’t happen in every deal, having solid numbers to talk about certainly helps reduce friction and invites lots of interest.
About Tim Bellon:
Tim Bellon, Owner VR Business Brokers: Tim was born and raised in North Dakota, and after the culmination of a 21+ year career in the U.S. Army, he and his wife Beth retired in Apollo Beach, FL. He earned his Bachelor’s Degree in History and Political Science from Concordia College, and a Master’s of Science in Defense Analysis from the Naval Postgraduate School.
Tim joined the VR Business Sales Team in 2012 as the owner and managing broker of an office serving the greater Tampa Bay, FL. During this time, he has focused on helping business owners realize their goals through selling, buying, or growing businesses. He also assists individuals, and companies looking to expand, in the identification and acquisition of businesses.
Tim is community-oriented and is a proud member of the following organizations; International Business Brokers Association (IBBA), Business Brokers of Florida (BBF), SouthShore Chamber of Commerce, Commercial Finance Association (CFA), American Legion, Disabled American Veterans (DAV), and the Knights of Columbus. Tim can be reached via email at TBellon@VRSouthShore.com.
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Video: Tampa Bay Business Broker Tim Bellon Offers His Mid-Year Update
It was a rough start for 2020 and business owners everywhere are wondering what the future holds. In this video, Tim Bellon, VR Business Broker offers his perspective on what the last 6 months has meant to business value, and maybe more importantly, how to navigate the rest of the year and beyond. Can you still exit your business in 2020?
See the discussion between Tim and Brian Barquilla of BuildMyReputation.com
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