What is a Buy-Sell Agreement?
To begin with, if you are like me you may be wondering what a buy-sell agreement is, otherwise known as a buyout agreement.
“A buyout agreement gives owners a way to deal with ownership disruptions in a way that won’t wreck their business, by providing pre-established rules for transferring interest,” John Thiel said in his seminar What is a Buy-Sell Agreement? In other words, it is a binding contract between you and the other co-owners.
In the webinar, Thiel discusses where an agreement is needed versus when an agreement is not needed. For example, an agreement is not needed if you are 100% the business owner, or if you own the business with your spouse, or if you own the business with one of your children. But even in these cases, there are dangers to not having an agreement.
Dangers of not having a buyout agreement include possibly working with someone in the future who may be an inexperienced stranger, or the survivors may become stuck, or the co-owners may argue about their ownership interest.
Thiel also discusses two key provisions, buyout structures, funding buyouts and how to set the price in his webinar.
I was surprised by how complicated the agreement is with many different elements and scenarios to consider. It dawned on me when listening to the webinar how important a buy-sell agreement is within a business and how every business should have one. Without an agreement, it could easily cause chaos and disputes between the owners. One owner could decide to hand over their ownership to someone new without consulting the other. This would result in a restructure to take place without discussing or offering ownership to the other one.
Many students dream of one day owning their own business. Whether that is a hair salon or an insurance company or a children’s entertainment club, learning how to organize the ownership and having a structure for the future is valuable. Anyone can start a business and be successful, but it the part of how it is managed which yields different results.
Here is an example to explain further how a buy-sell agreement works by Chia-Li Chien, the director of the financial planning program at California Lutheran University.
Josh and Jerry started their Gaming App, before you know it, the company is worth $10 Million. Several private equity firms knocked on the door that are interested buying their firm. If Josh and Jerry did not have a proper Buy Sell Agreement in place, the private equity firm will take advantage of them. Why?
The less structure shows the vulnerability. Buy-Sell is one of the agreements among many in a business. Having proper structure enhances the business equity value. Josh and Jerry sold their firm in $100 Million earlier this year. Obviously, there are other questions and issues with this case study.
It is important how a business is managed by setting up a structure like a buy-sell agreement, it allows the owners to have a plan and work around problems or issues.
We all know that the future is unknown and difficult to predict which is one of the reasons why it is so important to organize an agreement at the beginning of starting a company. There are lots of different components to a buy-sell agreement that must be thought of. It can seem daunting and scary at first but the more it is understood and prepared for the better.
To learn more about a buy-sell agreement work with a Certified Financial Planner (CFP) practitioner or reach out to the Financial Planning program here at California Lutheran University.
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About the Speaker:John Thiel is an advisor at Marin County Private Ocean. He was previously an advisor at Fountainhead Wealth. Before that he worked at Northwestern Mutual and MassMutual, specializing in risk management and insurance solutions. Thiel has a Bachelor of Science in Business with a concentration in International Business. He has a CFP designation and is currently studying for an MBA in Financial Planning at California Lutheran University, graduating in the Spring of 2020. Thiel has had a passion for wealth management since a relatively young age. |
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About the Author:Rosie Baker is an undergraduate student at California Lutheran University studying Communication with an emphasis in PR and Advertising. She is also minoring in Creative Writing. |
References:
John Thiel. (n.d.). Retrieved from https://privateocean.com/bio/john-thiel/
To watch the archived webinar, click the link below:
What is Buy-Sell Agreement? – Webinar
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