What Co-Owners Need to Figure Out Now to Avoid Problems


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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. 1. What Co-Owners Need to Figure Out Now to Avoid Problems Later Drink ‘N Think Eliot M. Wagonheim 1/17/2013303 International Circle Suite 390 Hunt Valley, MD 21030 p. 410.584.1110 www.wagonheim.com
  2. 2. GovernanceHow 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 CoursePurchasing office suppliesHiring a receptionistHiring a ComptrollerFiring an employeeSigning a lease for office spaceHiring or changing attorneys or accountantsOpening up a new bank accountMerging with another companyOpening up a new territorySigning a contract for a new projectTaking on a new clientBuying new equipmentOpening up a line of creditTaking an advance on a line of creditAdjusting someone’s salaryClosing or liquidating the companyPhone: 410.584.1110www.wagonheim.comewagonheim@wagonheim.com
  3. 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 QuestionsDeath: 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. 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. 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. 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