If the answer is NO! This article is for you.
Formal Succession Plans and Buy/Sell Agreements are documents most Jewelry business owners know they should have, but don’t… When first starting the business, it’s another document you have to pay someone to write, and you have already spent a boatload of money getting the business going. Why should there be a problem? You are in business with your best friend from college, or you cousin, who you’ve known as long as you can remember, or better yet your brother or sister. What could go wrong?
When you start or take over a business, all parties are still “on the Honeymoon “. Everyone’s interests are aligned (or at least should be). The Succession Plan is written so those taking over the business will know what is going to happen, when it will happen, and under what conditions. The Buy/Sell Agreement establishes the conditions for buying or selling an owner’s interest, when and if certain conditions occur.
The most obvious is what happens at the death or permanent disability of an owner. How is the purchase of the interest structured? How do you determine the value of the interest? What are the terms of sale? Are you required to purchase the interest, or is it an option, but not an obligation to buy. These issues will be discussed later in the article. But, is all of this stuff worth it? That can be answered with one question. Do you really want to be in business with you deceased partner’s husband, wife, children, or better yet, their attorney?
Another important issue is when an owner wants to sell his/her interest in the business to a completely unrelated third party. Does the Company or other owners have a right of first refusal, where they can purchase the selling owners interest instead of having it purchased by a third party?
Other than death of an owner or sale of an interest as described above, a buy/sell agreement should cover many other situations. What happens when an owner retires or just doesn’t want to be in the business any more? If owners just can’t get along any more what do they (you) do? If an owners actions are hurting the company, can you force a buyout of his/her interest. If an owner is going through a divorce, which will affect the business, what are your options?
Can an owner force the purchase of his/her interest or do the remaining owners have the right, but not the obligation to purchase the interest?
Funding the agreement is critical. If there is no mechanism in place to fund the agreement, then the best agreement in the world is worthless. Is there life insurance or disability insurance to cover the value of the interest? If not, do you give a note and pay over a set period of time, get a bank loan (Anyone tried that lately?), or purchase the interest with personal funds?
Finally, how is the value of company determined? One way is for the owners to agree on a value. It may be correct, but it is probably too high or too low and possibly substantially so. Often that agreement is put in the back of a file cabinet and not seen again for years, until a triggering event happens. At that point the values in the agreement are completely out of date. Book value is another way to set the value of the interest, but that is accounting value which generally does not reflect “real” value.
The most accurate way is to have a professional business valuation, as of the date of the triggering event, performed by a qualified business valuation analyst who also has knowledge of the industry. It’s the best option to give you the most accurate value.
When there is no buy/sell agreement in place and a triggering event happens, interests are generally no longer aligned. Each party looks at the situation from their current perspective, not what is best and fair to all parties. At a minimum, there will be disagreements, conflicts, and damaged relationships. On the other end there can be lawsuits; expensive lawsuits.
When parents have a business, which they will turn over to more than one child, one of the best things they can do is to establish a buy/sell agreement between their children, with their input as well. This puts an initial agreement in place which can always be changed as necessary or appropriate.
Succession plans and buy/sell agreements are necessary and important documents that every Jewelry Business should have and keep up to date.
About the author:
Dan Pharr is a CPA, with two certifications in business valuation and is President and Founder of Pharr Valuation, Inc. He spent 28 years with Hoover & Strong, Inc as Chief Financial Officer. Hoover & Strong is a refiner and manufacturer of precious metal mill products, findings, castings, and related products for the jewelry industry. Dan will be leading a seminar at the American Gem Society Conclave in April 2015, where participants will write their own buy/sell agreements by selecting options from a basic template. (www.pharrvaluation.com)