|
Newsletters
Archives
April 2005
Key Valuation Provisions in Buy- Sell Agreements 
Submitted by: Bethany King, CPA, CVA
In a volatile and uncertain business climate, a well-planned buy-sell agreement can cut off potential problems at the start - before they have a chance to bring down a company or partnership.
Future Imperfect
In writing an agreement, a closely held business owner and his or her attorney must incorporate provisions that determine what will happen to the company in the event of death, disability, voluntary or involuntary withdrawal, divorce, bankruptcy or insolvency. More specifically, they need to resolve several significant issues, including:
- Whether to use a repurchase agreement or a cross-purchase agreement,
- What triggering events to include,
- How to facilitate future tax planning, and
- How to fund the agreement.
In the process of dealing with these questions, though, they may lose sight of key valuation-related provisions that can strengthen the agreement and greatly ease transition pains.
For many attorneys and business owners, the best way to ensure a buy-sell agreement addresses the pertinent valuation issues is to use an outside valuation professional. Whether you decide to hire one, two or more valuators, make sure they are independent and have the appropriate professional credentials and experience.
In addition, you'll have to decide who will pay the valuators' fees and how to resolve potential disagreements between valuators regarding the company's value. You may also want the agreement to include specific valuator or firm names to avoid having to search for these later.
Defined Value
A clearly defined value premise is an important component of the buy-sell agreement. Attorneys and valuators typically refer to Revenue Ruling 59-60's definition of "fair market value," which is what shareholders usually expect to receive for their interests.
But the value premise may vary depending on the company's characteristics and circumstances - and the triggering event. Some buy-sell agreement provisions give a shareholder less than fair market value if he or she leaves because of misconduct or voluntarily decides to exit the company.
Valuation Discounts
After defining the value premise, the agreement needs to address the issue of valuation discounts. For instance, the valuator needs to ask:
- Are controlling interests subject to a discount for lack of marketability?
- Are minority interests subject to both a discount for lack of marketability and a discount for lack of control?
- Should a key-person discount be taken if the triggering event was an important shareholder's death or departure?
In addition to deciding which discounts (if any) are appropriate, you may want to request that shareholders agree to specific percentages at the outset to avoid future disagreements.
Valuation Formulas
How will value be determined when the unexpected happens? Some agreements incorporate a formula or industry "rule of thumb." For instance, simply looking at the book value on a specific date or using an earnings before interest, taxes, depreciation and amortization (EBITDA) multiple might be a quick way of coming up with a value number.
But though they may appear to save time and money, valuation formulas are not as simple as they seem. Two different people are likely to interpret the term "book value" or calculate the earnings base differently. Depending on how they approach it, their value estimates could vary widely even if they use the same formula.
And valuation formulas tend to be inflexible, failing to account for subjective factors. For instance, just using the EBITDA-multiple formula without adjusting it for discretionary or unusual items, such as excess officers' compensation or nonrecurring income, is likely to result in an inaccurate number.
A Fair Agreement
Many buy-sell agreements list consensus between parties as the first way of estimating a company's value and turn to other methods if the shareholders can't agree. This can be one of the fairest methods - but there is a catch: The parties have to agree to agree.
Agreement between parties probably shouldn't be the only method for determining value listed in a buy-sell agreement. Why? If an adversarial situation arises among the company's shareholders, litigation is likely to ensue.
Another option is to require shareholders to agree on the company's value once a year. This agreed-on value then becomes the one used for the buy-sell agreement until the parties update it again the following year. But busy shareholders and attorneys may be tempted to procrastinate on the yearly agreement, leaving the parties vulnerable to problems when a triggering event occurs.
Unconventional Alternative
A rather unconventional but interesting way to convince shareholders to agree on a company's value is to use the "Texas shoot-out" method. No guns are required. Using this method, a shareholder who offers to buy another shareholder's interest also has to sell his or her own interest for the same price.
This may not be the best option if death is the triggering event, thus favoring shareholders with better access to financing. But it may help keep shareholders from low-balling each other.
Predictable Result
Unexpected events can cause unpredictable behavior. To reduce the possibility of an upset and ensure smooth transitions in difficult circumstances, business owners and their attorneys must try to predict and plan for every eventuality. No one buy-sell agreement is right for every situation. But regardless of the situation, choosing the right valuation provisions is key.
For more information on the above topics, please contact Bethany King at 256-533-1720 or email at bking@beasonnalley.com. Five Tips for Effective Employee Recognition
How to Reward, Recognize, Award, and Thank People Successfully
Submitted by: Carolyn Scarborough
Employee recognition is not just a nice thing to do for people. Employee recognition is a communication tool that reinforces and rewards the most important outcomes people create for your business. When you recognize people effectively, you reinforce, with your chosen means of recognition, the actions and behaviors you most want to see people repeat. An effective employee recognition system is simple, immediate, and powerfully reinforcing.
When you consider employee recognition processes, you need to develop recognition that is equally powerful for both the organization and the employee. You must address five important issues if you want the recognition you offer to be viewed as motivating and rewarding by your employees and important for the success of your organization.
The Five Most Important Tips for Effective Recognition
- You need to establish criteria for what performance or contribution constitutes rewardable behavior or actions.
- All employees must be eligible for the recognition.
- The recognition must supply the employer and employee with specific information about what behaviors or actions are being rewarded and recognized.
- Anyone who then performs at the level or standard stated in the criteria receives the reward.
- The recognition should occur as close to the performance of the actions as possible, so the recognition reinforces behavior the employer wants to encourage.
You don't want to design a process in which managers "select" the people to receive recognition. This type of process will be viewed forever as "favoritism" or talked about as "it's your turn to get recognized this month." This is why processes that single out an individual, such as "Employee of the Month," are rarely effective.
A Working Example of Successful Recognition
A client company established criteria for rewarding employees. Criteria included such activities as contributing to company success serving a customer without being asked to help by a supervisor. Each employee, who meets the stated criteria, receives a thank you note, hand-written by the supervisor. The note spells out exactly why the employee is receiving the recognition. The note includes the opportunity for the employee to "draw" a gift from a box. Gifts range from fast food restaurant gift certificates and candy to a gold dollar and substantial cash rewards. The employee draws the reward, so no supervisory interference is perceived. A duplicate of the thank you note goes into a periodic drawing for even more substantial reward and recognition opportunities.
More Tips About Recognition and Performance Management
- If you attach recognition to "real" accomplishments and goal achievement as negotiated in a performance development meeting, you need to make sure the recognition meets the above stated requirements. Supervisors must also apply the criteria consistently, so some organizational oversight may be necessary. The challenge of individually negotiated goals is to make certain their accomplishment is viewed as similarly difficult by the organization for the process to be a success.
- People also like recognition that is random and that provides an element of surprise. If you thank a manufacturing group every time they make customer deliveries on time with a lunch, gradually the lunch becomes a "given" and no longer rewards. In another organization, the CEO traditionally bought lunch for all employees every Friday. Soon, he had employees coming to him asking to be reimbursed if they ate lunch outside the building on a Friday. His goal of team building turned into a "given" and he was disappointed.
- There is always room for employee reward and recognition activities that generally build positive morale in the work environment. In one company, there is a "smile team" that meets to schedule random, fun employee recognition events. They have decorated shop windows, with a prize to the best, for a holiday. They sponsor ice cream socials, picnics, the "boss" cooks day, and so on, to create a rewarding environment at work. Another company holds an annual costume wearing and judging along with a lunch potluck every Halloween.
Rewards and recognition that help both the employer and the employee get what they need from work are a win-win situation. Make this the year you plan a recognition process that will "wow" your staff and "wow" you with its positive outcomes.
Written by: Susan M. Heathfield and published in About, Inc.
For more information on the above topics, please contact Carolyn Scarborough at 256-533-1720.
Coffee Talk
Gail Wall was a guest on "Law Line" on Sunday night, April 9th for Channel 31. This was a call in program for people to ask tax questions from a professional.
Thanks to everyone for all of the support during a very busy tax season! Related Information:
BACK to Archives Also see:
Why Choose Us? | Industries | Contact Us
|
