Nearly every closely-held business has one or more governance documents which address the operation, management, and continuity of the organization. This might include an operating agreement, partnership agreement, or shareholders’ agreement, depending on whether you are a limited liability company, a general or limited partnership, or corporation, respectively.
Oftentimes, these agreements contain transfer restriction provisions, or “buy-sell” provisions, which can have an impact on the owners of the business upon the happening of certain triggering events.
We recommend business owners review their agreements today in order to ascertain whether any triggers could arise in these extraordinary times. Such triggers might include death, disability, divorce, termination of employment, bankruptcy, or insolvency of a key stakeholder in the business.
- Triggering Events: Ascertain what triggering events are set forth in the Agreement, and understand what happens upon the occurrence of a triggering event. Oftentimes, agreements either require, or give an option, for the company or one’s other business partners to acquire an exiting owner’s interest on certain agreed-upon terms. Understand what your rights and duties are.
- Valuation: Not only do agreements often mandate a sale, but they also dictate the price at which the purchase and sale is to occur. This might include an agreed upon calculation of value, a formula, a battle of appraisers, or some combination of the above. Understand how one’s interests would be valued if a triggering event were to occur. If an agreed-upon certificate of value approach is contemplated, ensure the calculation is up to date.
- Application of Discounts: Be mindful whether shares or interests would be acquired with or without the application of a discount. Many agreements apply discounts for minority interests, or in the event of certain triggers and not others, such as applying in termination of employment or bankruptcy, but not death.
- What are the Payment Terms: Be mindful of the method of payment. This might include the use and application of insurance proceeds (life or disability insurance), a promissory note and installment purchase, or some combination. Understand the impact of the payment terms on company and/or owner cash flow. Are the payment terms feasible? Is the buyout affordable in light of other pressures facing the company?
- Review your Insurance: If your agreements are supported by life and/or disability insurance, undertake an insurance review with your insurance advisors. Ensure you have adequate death and disability coverages in line with the valuations discussed above. In addition, if you have whole life insurance policies with cash surrender value, and are faced with urgent working capital needs, consider exploring policy loan and collateral alternatives with your insurance advisors and business bankers in lieu of cancelling your policies.
If you need assistance in reviewing your company agreements, please contact Brian Kahle or any of the attorneys of the Tucker Arensberg, P.C. Business and Finance group today.