The Buy-Sell Audit

Many companies with multiple owners have a Buy-Sell Agreement (also called a Shareholders Agreement, Cross-Purchase Agreement, or in the case of an LLC, Operating Agreement) that was put into place years ago, often at the time the company was formed, and often without significant advance thought or analysis. Most business founders don’t want to spend a lot of time considering exit scenarios when they are in the process of forming the company. Even if significant thought was put into the Buy-Sell at that time, it is likely that circumstances have changed and the old Buy-Sell is not up to the task of what is more likely to happen now than back when the company was formed. Company owners rarely step back and objectively evaluate their Buy-Sell Agreement once it is in place. I’ve seen too many companies arrive at an ownership transition situation, only to end up in litigation because the provisions for transferring ownership were not adequate, or not what the parties thought they were. A current evaluation can prevent legal problems and ensure a smooth transitions of ownership when the time comes. To help companies and their owners evaluate their Buy-Sell agreement, I provide the Buy-Sell Audit.

The Buy-Sell Audit is complete analysis of your company’s Buy-Sell Agreement, based on my experience with these kinds of agreements since I started practicing in 1986. I gather information from you, review your Buy-Sell and the other primary company documents, and provide you with a written analysis of your agreement and suggestions for improvement. Then I meet with the founders to go over the Audit Report and answer any questions.  Together, we will determine what revisions should be implemented to the agreement.  At that point, the company can either proceed to make revisions with my assistance, or, if they have other regular counsel, can engage that counsel to make the revisions. I’m not out to replace your current advisor, if you have one.  Rather, I offer an independent valuation and strategies to improve your Buy-Sell that your current advisor may not be in a position to offer.

The Buy-Sell Audit includes an evaluation of the following topics:

  • Transfer Restrictions
  • Allowed Transfers
  • Conflicting Restrictions
  • Trigger Events
  • Identity of Purchasers
  • Shares Covered
  • Rights of First Refusal
  • Timing of Elections
  • Valuation Determination
  • Valuation Methodology
  • Payment Terms and Conditions
  • Sources of Purchase Funding
  • Offset Rights
  • Clawback Rights
  • Drag-Along Rights
  • S Corp Restrictions
  • Interactions with Other Entities
  • Required Distributions
  • Special Voting Rights
  • Board and Officer Designations
  • Anti-Deadlock Provisions
  • Capital Call Requirements
  • Proprietary Rights Protections
  • Corporate Opportunity Requirements

The Buy-Sell Audit is a business ownership succession plan “check-up” with its primary goal to make sure there is a smooth ownership transition under all circumstances. The Audit provides recommendation designed specifically for the circumstances of your company. If you or your client prefers not to get caught up in a succession dispute, the Buy-Sell Audit may be just the thing.

About the Author

John Koenig
John Koenig
administrator