Buy-sell agreements are well-thought-out blueprints that ensure the continued success of the company and compensate owners for their contributions.
Update: 9/20/2017
Brian Buwalda died accidentally in the wake of hurricane Irma. He will be deeply missed by our CLA family. Brian’s writing skills provided readers with informative, relevant, and interesting articles. Month after month his stories were the most viewed on the construction industry web page. His life and his writing have impacted many, and we are grateful to have known him and his work.
I was once told that it wasn’t a question of if I would leave my company one day; it was only a question of when. As an owner and committed lifetime employee, I found this news a bit disturbing. Upon deeper reflection, though, I realized it was true.
Considering succession
Once we come to terms with the fact that owners and founders will one day leave their companies, we can begin to focus on specific questions, like:
- When I leave, will the company, my partners, the employees, and the customers continue to benefit from the legacy I’ve built?
- Will the company and our people have the resources (management, financial, leadership) to continue to enhance the lives of our employees and the customers we serve?
- How can I exchange my ownership position in a way that ensures I receive the full monetary value I’ve built up in the company, while still leaving it financially secure enough to continue operations?
Contractors understand the need to plan in advance. We don’t just decide to build something without looking into zoning, blueprints, budgets, financing, material and labor costs, timing, staffing, sub-contractors, and what we will be paid for the final product. We plan all of this out in advance. Yet many construction company owners don’t adequately plan for their departure from their companies.
In most cases, the company is an owner’s most valuable asset—so a thoughtful transition is important. Buy-sell agreements are well-thought-out blueprints that construction company owners enter into to ensure that their business, partners, employees, and customers continue to benefit from the continued success of the company, while at the same time, adequately compensating the owners for their contributions to its success.
Buy-sell agreements
Buy-sell agreements deal with all aspects of an owner’s departure. First, the agreement defines different types of “exit events” (death, disability, retirement, leaving to pursue other interests, ownership rifts) and how succession will be achieved in each situation. One of the most contentious issues is determining the definition of “disabled.” Another relates to who stays and who goes in ownership disagreement cases.
Second, the agreement establishes a value for the buyout (based on business valuations, agreed-upon values, or formulaic pricing). Deciding a fair value for the company is best done well in advance of the need for it.
Third, the agreement provides a funding mechanism for the buyout. Life insurance works well in the case of death, but other exit events will involve some combination of cash and deferred payments that seeks to balance the needs of the seller with those of the company and its owners in a way that maintains sufficient liquidity for operations and continued success.
Finally, the agreement works through management succession terms and other matters the owners would like to address specifically so that there is no ambiguity when an exit even occurs.
How we can help
Our experience shows that well-planned designs, created when all parties are in harmony, produce much better success stories than those executed in times of duress. Rather than waiting until your exit event happens (because it will happen), ensure the success(ion) of your company by creating or updating a buy-sell agreement.