We are excited to share the release of our latest book Buy-Sell Agreements: Valuation Handbook for Attorneys authored by Z. Christopher Mercer, FASA, CFA, ASA and published by the American Bar Association. This week, we share an excerpt from the book that discusses what you can expect to find in the full copy. Whether you are an attorney who advises clients on their buy-sell agreements or are a party to a buy-sell agreement, you will find important information in this book. You can purchase your copy of the book here.

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Most Buy-Sell Agreements Are Ticking Time Bombs

Buy-sell agreements are, for the most part, ticking time bombs. They are written, filed away, and then ignored, in most instances, for years. A buy-sell agreement becomes important only after something called a “trigger event” occurs. Someone dies, is fired, is divorced, goes bankrupt, or has a change of life experience, and then, the owners of a business find that their buy-sell agreements are invoked. In most of the buy-sell agreements I have seen that have been triggered, bad things have happened.

This book can help you help clients avoid ticking time bombs when their agreements are triggered and achieve reasonable resolutions for future transactions that may or will occur.

There are three primary types of buy-sell agreements as categorized by their valuation mechanisms. Unfortunately, most of them will not work to determine reasonable resolutions when future trigger events occur. For example, consider:

1. Fixed price agreements. The owners agree on a price, record it in Exhibit A to their agreement, agree to update the price each year, and then never do. Nothing good comes from dated fixed price agreements. I do not recommend fixed price buy-sell agreements.
2. Formula agreements. All the owners need to do is to agree on a formula to determine price when trigger events occur. But no formula designed today will provide a reasonable, realistic price for a business in the future under all possible future events that will occur in the business, its industry, its regional or national economy, and more. I do not recommend formula buy-sell agreements.
3. Valuation process agreements. The owners agree on a valuation process found in some templates. Most such processes call for the use of multiple, usually three, appraisers to determine price at future trigger events. The many problems with such agreements center on the fact that no one knows what will happen with future appraisal processes. No one knows if the language in an agreement specifies a “workable” kind of value for the appraisers to determine, and no one knows how the future appraisers will be, how they will be selected, or how they will approach their valuation assignments.

Experience suggests that these primary types of buy-sell agreements will likely not result in reasonable solutions for affected parties. In the words of the title to my first book on buy-sell agreements, most agreements are ticking time bombs.

This Book Provides Solutions for Buy-Sell Agreement Valuation Processes

Readers might ask an important question: What solutions do you offer for the problems you say are prevalent with buy-sell agreements? This book is all about solutions for problems with buy-sell agreements, including:

• Four valuation processes involving a single business appraiser to determine price at future trigger events.
• One of these single appraiser processes provides a multiple appraiser option for parties to involve additional appraisers, but in a different order than the traditional three appraiser processes that so often do not work.
• Flow diagrams are provided so that attorneys, business owners, and other advisors can visualize the steps in intended valuation processes and can better understand the language in their agreements that spells out the processes.
• Sample language to potentially assist attorneys in drafting the valuation portions of client buy-sell agreements.

Outline of This Book

Buy-Sell Agreements: Valuation Handbook for Attorneys is written in four parts. Parts I and II address buy-sell agreement basics and pricing mechanisms. Parts III and IV provide recommendations and sample language for valuation process agreements. In summary, the book is organized as follows:

Part I. Buy-Sell Agreement Basics (Chapters 1-7)

As always, I speak and write from business and valuation perspectives only. Part I introduces the topic of buy-sell agreements and discusses the various categories and types of agreements. There is a chapter on trigger events to facilitate thinking when drafting agreements. Importantly, there is an overview of funding mechanisms for buy-sell agreements. Separate treatment is accorded to life insurance, which is used as a funding mechanism for many agreements.

Part II. Buy-Sell Agreement Pricing Mechanisms (Chapters 8-12)

There is a separate treatment of the three primary types of buy-sell agreements, including fixed price agreements, formula-pricing agreements, and valuation process agreements. There is a chapter addressing typical multiple appraiser valuation processes that indicates why these processes are not recommended by this book. And there is a short chapter illustrating why many multiple appraiser valuation processes do not and, perhaps, cannot work.

Part III. Recommended Buy-Sell Agreement Pricing Mechanisms (Chapters 13-16) 

In Chapter 14, this book recommends the Single Appraiser, Select Now and Value Now (and Annually Thereafter) valuation process as the preferable pricing mechanism for most successful closely-held and family businesses. For those who are wed to multiple appraiser processes, Chapter 15 introduces a new idea in the Choose the Third Appraiser First valuation process. The last two single appraiser processes are the Single Appraiser, Select Now and Value Later (at the Trigger Event) process and the Single Appraiser, Select and Value Later (at the Trigger Event) process. I recommend the last two processes only as additions to existing agreements to provide for workable valuation processes when fixed price or formula agreements fail.

Part IV. Sample Language for Buy-Sell Agreement Valuation Processes (Chapters 17-20).

Part IV of the book distinguishes it from any of my previous books on buy-sell agreements and, for that matter, any other books in the marketplace. Over the years, I have been engaged to provide valuations pursuant to buy-sell agreements. I have also been engaged to provide expert testimony when the content of buy-sell agreements has not provided resolution and the parties resorted to litigation. In this section, I present sample language related to different valuation scenarios that readers may be considering incorporating into their buy-sell agreements.

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The Table of Contents is presented below to give you an idea of the content of each part and each chapter.

Table of Contents

Part I: Buy-Sell Agreement Basics

• Chapter 1: Introduction to Buy-Sell Agreements
• Chapter 2: Categories and Types of Buy-Sell Agreements
• Chapter 3: Why Most Buy-Sell Agreements Will Not Work and How to Fix Them
• Chapter 4: Trigger Events and Other Business Considerations
• Chapter 5: Overview of Funding Mechanisms
• Chapter 6: Life Insurance and Buy-Sell Agreements
• Chapter 7: Other Important Aspects of Buy-Sell Agreements

Part II: Buy-Sell Agreement Pricing Mechanisms

• Chapter 8: Fixed Price Buy-Sell Agreements
• Chapter 9: Formula Buy-Sell Agreements
• Chapter 10: The Elements That Define Every Valuation Process Agreement
• Chapter 11: Multiple Appraiser Valuation Process Agreements
• Chapter 12: An Illustration of an Inadequate Multiple Appraiser Process

Part III: Recommended Buy-Sell Agreement Pricing Mechanisms

• Chapter 13: Introducing Single Appraiser Valuation Process Agreements
• Chapter 14: The Recommended Structure: Single Appraiser, Select Now and Value Now (and Annually Thereafter) Agreements
• Chapter 15: Choose the Third Appraiser First (A Single Appraiser Process With a Multiple Appraiser Option)
• Chapter 16: Other Single Appraiser Valuation Process Options

Part IV: Sample Language for Buy-Sell Agreement Valuation Processes

• Chapter 17: Sample Language for the Single Appraiser, Select Now and Value Now (and Annually Thereafter) Valuation Process
• Chapter 18: Sample Language for the Choose the Third Appraiser First Valuation Process
• Chapter 19: Sample Language for the Single Appraiser, Select Now and Value Later (at the Trigger Event) Valuation Process
• Chapter 20: Sample Language for the Single Appraiser, Select and Value Later (at the Trigger Event) Valuation Process

To purchase your copy of Buy-Sell Agreements: Valuation Handbook for Attorneys, follow this link.