Business co-owners rarely walk through life in lockstep. One wants to retire; another wants to stay on. One wants to cut back; others are thinking expansion. At this Drink ‘n Think, we discussed what co-owners (members, stockholders, partners, or friends) need to do now to avoid disaster, foster prosperity, and preserve their relationships when it matters most.
Every month, we host free events at our office for small business owners to help strengthen their business. Eliot Wagoheim, managing member of Wagonheim Law, goes through this handout in the video http://bit.ly/XbElBX.
Check out our upcoming events here: www.wagonheim.com/events
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What Co-Owners Need to Figure Out Now to Avoid Problems
1. What Co-Owners Need to
Figure Out Now to
Avoid Problems Later
Drink ‘N Think
Eliot M. Wagonheim
1/17/2013
303 International Circle Suite 390 Hunt Valley, MD 21030 p. 410.584.1110 www.wagonheim.com
2. Governance
How is the company going to be run?
Who can decide what on his/her own?
When is super-majority or unanimous consent needed?
Event Ordinary Extraordinary
Course
Purchasing office supplies
Hiring a receptionist
Hiring a Comptroller
Firing an employee
Signing a lease for office space
Hiring or changing attorneys or accountants
Opening up a new bank account
Merging with another company
Opening up a new territory
Signing a contract for a new project
Taking on a new client
Buying new equipment
Opening up a line of credit
Taking an advance on a line of credit
Adjusting someone’s salary
Closing or liquidating the company
Phone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com
3. The 4 Considerations
1
Trigger Events. There are generally 5 ways to leave a company, each of which
serves as a trigger event for a buy/sell agreement:
Death
Disability
Voluntary withdrawal (short of retirement)
Retirement
Involuntary withdrawal
Key Questions
Death: Will the company or the owners purchase key-man life insurance
policies?
Disability: What constitutes a disability?
Voluntary Withdrawal: At what point can someone decide to walk away while realizing
most, if not all of the value of their equity?
Retirement: How, if at all, will “retirement” be defined? Age? Tenure with
the Company?
Involuntary Withdrawal: When, if at all, can an owner be forced to leave the company?
Phone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com
4. 2
Valuation. How are you going to determine the value of the company at any
given time? There are quite a few methods at your disposal. The options most
frequently chosen are:
Annual agreement among the owners
Determination by the company’s CPA
Agreed formula
Professional valuation upon occurrence of trigger event
Texas buy-out
Key Considerations
Annual Agreement: If the owners don’t set a price, there is a very real risk that the
value in the document will be hopelessly outdated when
needed.
Determination… Is the CPA qualified to make this decision in his/her sole
discretion?
Agreed Formula: Is there a formula that will accurately reflect the value of your
business for years to come?
Professional Valuation: Is the company and are the owners willing to absorb the cost of
1-3 valuations?
Texas Buy-Out: Are there thresholds, time limits, or circumstances under which
it can’t be used in its pure, unrestricted form?
Phone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com
5. 3
Purchase Price. The purchase price is expressed as a percentage of value and is
based upon the concept that the trigger event has a direct impact on both the
purchase price and the payment method (Step #4). For example, someone
terminated (involuntary withdrawal) because of embezzlement would typically not
be bought out for 100% of their value, but perhaps 50 to 60 percent. The payment
would also normally be made over a longer period of time.
Key Considerations
The key decision here is what percentage attaches to each trigger event. Many, though by no
means all, companies use a range along the following lines:
Death 100%
Disability 100%
Voluntary Withdrawal 70% - 80%
Retirement 100%
Involuntary Withdrawal 50% - 60%
Phone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com
6. 4
Payment Method. This is where cashflow considerations come in. It is difficult
for most companies to continue paying their operating expenses while funding a
significant buy-out. Payment methods usually involve a Promissory Note signed
by the company, for terms which may run from 5 to 30 years depending upon the
age of the founders, the trigger event involved, and the availability of insurance.
Key Considerations
1. For each trigger event, what kind of balance can be struck between the company’s
cash flow needs and the former owner’s need (and rightful desire) to reap the rewards
of his or her investment in the company?
2. The knife cuts both ways.
Phone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com