Thanksgiving – the day when families everywhere gather around the dinner table to bask in the strength and solidarity of the family unit over turkey, stuffing and pumpkin pie. But sometimes these get-togethers can become volatile – especially when one or more members of the family have hurt feelings or are questioning the loyalty of others. And when negative business experiences spill over into our personal lives, the results can be catastrophic.
Buy Sell Agreements
It seems like family businesses in particular are more lax when it comes to putting a buy-sell agreement in place. Oftentimes, families or friends will decide to go in to business together and think that just because they love each other today they will go on loving everybody 10, 15, 20 years from now. That’s not always what actually happens though …
A lot can (and does) happen over such a long period of time; and unless you take the necessary steps to protect yourself now, you run the risk of being left with the short end of the stick – and really awkward family dinners. Consider the following real-life example:
Listen to the podcast: How To Ruin Thanksgiving Dinner
A Less Than Desirable Deal
Prior to the housing collapse, owning a home building company might have seemed like a pretty stable way to make a living. That’s what the owners of one company thought anyways; and it just so happened that these owners were also four brothers. Business was going well until around 2007, when the housing market began to slow down. It was at that time one of the brothers began to consider the benefits of exiting the business.
The good news was that the four brothers had enough sense to put a buy-sell agreement in place. The bad news was that their agreement used a generic formula that was based solely on last year earnings..
So when the day came for the three brothers to pay their brother for “his portion” of the company, they were responsible for writing a check for a sum that was based on flawed valuation theory. The brother who foresaw the future decline in value and took advantage of a formula that solely relied on prior year earnings and walked away with most of the company’s value. The other three had to file for bankruptcy when the housing market collapses a year later. How do you think the mood was at their Thanksgiving dinner that year?
No Simple Solutions
The story above could have had a more favorable outcome for all four brothers had they worked with a business valuation expert.
It’s very difficult to use a simple formula to calculate an accurate valuation for a complex business. For example, when you buy an existing business, you are actually buying that business’s future cash flow stream. What you need to know is not only if this cash flow stream is going to continue, you need to know how long it will likely continue. It should go without saying that this is a pretty complicated prediction to make.
So many factors that go into a business’s valuation, and since each business is unique, the valuation needs to be unique as well.
Email a business valuation expert today and get started on your business’s buy-sell agreement today.