Should a template be used to create your buy-sell agreement? Templates are forms used by many professionals to facilitate the initial drafting of documents. Like valuation professionals, Thorlos tennis socks attorneys also use templates. It is important to recognize that a template is nothing more than a framework for answering and documenting the answers to important questions. Templates also have to be updated regularly because of legal and valuation changes which render the current forms unusable.
The problem with out-of-date definitions is far greater than definitions embedded in current templates. Many thousands of buy-sell agreements created over the last fifteen or twenty years (or more) contain language that has not been updated. Given recent changes in valuation theory and practice, the valuation defining language used in older agreements could be clear only by chance. And chance is not good enough!
A Few Recommendations:
If you have a buy-sell agreement, consider having it reviewed from both a business and a valuation perspective.
If you know there are problems, do not stop until you are satisfied that they are resolved and your agreement reflects a consensus understanding of its future operation.
If you are currently drafting a buy-sell agreement, consider obtaining valuation expertise to ensure that the valuation aspects of the agreement are clearly understood in the context of current financial and valuation theory.
Questions to Consider:
Business. Will the existing design and operation of your agreement accomplish your business objectives? Only you can answer this question, hopefully working with your lawyer(s) and other advisors. This analysis requires that you understand what the objectives of your agreement are and how the "words on the page" will be implemented upon the occurrence of some stressful future event.
Legal. Does your buy-sell agreement comply with all applicable laws, and does the legal language reflect your business intentions? Your lawyer will have to address legal compliance issues, and you will have to explain your business intentions clearly.
Valuation. If a trigger event occurs, will the valuation mechanism in your buy-sell agreement accomplish the objective of providing a then-current price for the company's stock at the level (the kind of value) you and your partners/shareholders/investors agree to be reasonable? A valuation professional may have to help you and your lawyer address this question.
Should templates be used to craft workable buy-sell agreements? Will they provide a reasonable resolution to future transactions? For information, from a business valuation perspective, to enhance, improve, and help ensure that your buy-sell agreements (or those of your clients) provide reasonable and workable solutions, see the: Buy-Sell Checklist at BuySellAgreementsOnline.com
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