When is the last time you reviewed your company’s buy-sell agreement? If you’re like the owners of many private companies, that document is sitting in a file collecting dust. The stagnant legal document is often viewed as something that you create and then put away, only looking at if a business partner dies, retires, gets sick or decides to leave.

But that is a big mistake, says Mario O. Vicari, director at Kreischer Miller in Horsham, Pa.

“The buy-sell agreement is a critical roadmap that outlines the economic terms and conditions of transactions between a company and its shareholders in case of a triggering event in a private company’s stock,” says Vicari. ”It essentially determines the market for the company’s stock among shareholders.”

The buy-sell agreement is a highly customized document that a company’s shareholders should intimately understand and should play an active role in crafting so that it reflects their collective intent.

Smart Business spoke with Vicari about how to execute an effective buy-sell agreement.

What is the purpose of a buy-sell agreement?

First, when structured properly, a buy-sell agreement reflects the intent and the bargain of shareholders relative to transactions in a private company’s stock.  For this to occur, shareholders should participate in the crafting of the document and its provisions, and review it at least annually.

Second, the agreement protects the company by ensuring that its provisions do not present a set of economic circumstances that could jeopardize the company’s liquidity by requiring it to fund a transaction that was not planned for or properly structured.  Important elements to consider are reasonable valuation and payment provisions.

Third, it protects the shareholders and their families by providing funding mechanisms through proper insurance coverage in the event of an untimely death of a shareholder. Finally, a properly structured and monitored agreement helps avoid shareholder disputes and litigation because the economic provisions are well understood and agreed to by all parties in advance of any triggering events, and the valuation is monitored annually.

What are the important triggering events that should be addressed in a buy-sell agreement?

There are five major triggering events that are normally addressed in a buy-sell agreement: death, disability, separation from employment, retirement and sale. It is important to note that each trigger could cause different terms and conditions in the agreement, such as length of payout or discount on valuation.  For instance, a company can protect itself from an unanticipated liquidity event caused by an unplanned separation from the company by placing a discount on the valuation and/or longer payment terms on that transaction trigger.

There are two other common triggers — divorce and bankruptcy of a shareholder.  In each of these cases, company stock could become part of a divorce or credit estate and the holder of those shares would have the same rights as the other shareholders.  In order to avoid this type of situation, a well-designed agreement can prevent a shareholder from allowing shares to fall into someone else’s hands by requiring the shareholder to ‘put,’ or sell their shares back to the company in exchange for a note before the divorce or credit action is settled.

What are common mistakes that business owners make in these agreements?

The most common mistake is having a provision that the company’s value is to be determined by an outside appraiser in case of a triggering event. This causes problems on several fronts. First, when shareholders don’t understand the value of their shares within the agreement, they are often surprised when a trigger occurs. This sometimes leads to bad feelings, disputes or litigation. It also does not allow shareholders to properly plan their personal affairs.

Second, when an important variable in the agreement such as the value of the shares is not known, it is impossible to know whether other elements of the agreement are properly structured, such as the amount of life insurance to carry or whether the company can afford the payout provisions. A better strategy is for the shareholders, with the help of a valuation adviser, to develop a formula that is contained in the agreement that can be measured and quantified each year after the company’s financial statements are complete.

This allows shareholders to monitor the value for their sake, as well as the company’s, and to make sure that the valuation and payment provisions are reasonable in light of the company’s current financial position and cash flows.

Who should be involved in drafting a buy-sell agreement?

We think that balanced advice is very important. Certainly, all the shareholders should be active participants, as it is their company and their stock. We also think it is a good idea to include the company’s financial officer.

Outside advisers should include the company’s CPA, attorney and insurance counsel. If the company’s CPA does not have valuation expertise or credentials such as a CVA, then a valuation adviser may also be needed.

Mario O. Vicari is a director at Kreischer Miller, Horsham, Pa. Reach him at mvicari@kmco.com or (215) 441-4600. Follow him on Twitter @mariovicari.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Published in Philadelphia

Here’s a litmus test to determine whether your accounting firm is providing the level of service and expertise your business needs to grow and succeed. Ask yourself: Are you a better company today than you were a year ago?

“The right accounting firm will provide your business with proactive solutions, including tax saving, performance improvement and financing  ideas,” says Stephen W. Christian, CPA, managing director, Kreischer Miller, Horsham, Pa. “When you partner with a true adviser, accounting services  become an investment in your business’s future success.”

However, all firms are not the same, and you must choose wisely.

Smart Business spoke with Christian about how selecting the right firm can bring tangible results to your organization.

What is the significance of working with the right accounting firm?

The right accounting firm will support your business as a trusted adviser and serve as much more than a provider of tax services and financial statements. All firms can prepare financial statements and tax returns, but what else are you getting for your money?

Your accounting, tax and advisory services should be viewed as an investment rather than the cost of a commodity. The reality is that many organizations that have not utilized a sophisticated accounting firm do not realize what they are missing: business advice and strategy based on company goals. The right accounting firm visits your place of business, gets to know the operation inside and out and can provide you with valuable insight to make your organization stronger.

What should a business consider when looking for an accounting firm?

That depends on what you’re looking for in an accounting firm. If you want to hire a transactional provider focused on preparing tax returns and financial statements, and cost is a key factor in your decision, you’ll find plenty of firms that perform these basic services.

But if you’re looking for more — a relationship with an adviser who gets to know your organization and can advise you on critical business decisions — then you’ll need a high-value firm that focuses on comprehensive client service. You’ll benefit from  a firm with a consultative approach.

So first, identify your needs: audit, tax, consulting, low-cost and value-added. Then, interview firms and select one based on your priorities.

How can a business identify potential firms?

Talk to your advisers and professionals who know your business, including lenders, lawyers and colleagues in trade associations. Ask them for referrals. Review accounting firms’ websites to see how the companies are represented. Do their priorities match with yours? Personally interview the team of professionals you are considering and not just the partners.

What type of value can a business realize when partnering with the right firm?

Your business will be stronger and  in a better position to succeed by engaging the right firm. A good accounting firm can provide an outside perspective that will sharpen the performance of your organization.

An accounting firm works with many diverse companies, and experiences what works and what doesn’t. Communicating mistakes to avoid can steer your company toward success. And it can share best practices from successful companies and help you execute those ideas at your organization.

Also, a good accounting firm is proactive and solution based, providing an abundance of advice on such matters as financing, compensation and benefits strategies, and risk mitigation. In addition, the firm can provide meaningful benchmarks against other similar companies and share ideas on optimal tax structures, beneficial technology initiatives and succession issues.

What are the keys to selecting the right firm?

Now that you have determined your priorities, be sure the firm’s service offerings are compatible with your needs. The team of accountants should be passionate about serving you — and team is the operative word.

Many businesses are disappointed when they select a firm based on one individual who works there, then later learn that they will be working with other associates that are not comparable. Find out who will service your needs, and make sure you meet the other players serving you. And be sure you can gain access to the firm’s leadership and decision makers. This is a common complaint among businesses that are unhappy with their accounting firm relationships.

You want a firm that recognizes the importance of your time and a firm that is respected in the community and has a philosophy of personal development. The right firm is forward thinking, not just a score keeper.  This firm will spend the time to get to know all aspects of your business and your industry.

What if a business is reluctant to cut ties with its current accounting firm?

First, ask yourself why you might be looking to make a change. Do you feel you are not getting the personal service you deserve? Is it difficult to reach the firm’s management? Do you want more from the firm that it is capable of providing?

Next, determine in an unemotional way which firm best fits your needs. Remember, this is an important business decision for your organization. You could consider maintaining your current firm for personal tax work while hiring a new firm for corporate work. And there are other creative ways to maintain the relationship if you must.

A firm that truly has your best interests at heart will partner with you to find a solution.

Stephen W. Christian, CPA, is  the managing director of Kreischer Miller. Reach him at (215) 441-4600 or schristian@kmco.com.

Insights Accounting & Consulting is brought to you by Kreischer Miller

Published in Philadelphia