Most architectural or engineering firms wouldn’t go into business without some basic types of insurance in place, such as errors and omissions (E&O) insurance and a general liability policy. For an A/E firms with more than one owner, a buy-sell agreement is an equally important risk-management arrangement.
If your firm has yet to create one, you should start the process as soon as possible. A conflict over an ownership change can distract a firm at the very least — and devastate it at worst, resulting in potential disruptions in operations and, ultimately, a decrease in firm value. Even if your firm has a buy-sell agreement in place, it should be reviewed annually to make sure that it still fits your firm’s needs.
Buy-Sell Agreement Basics
Whether its your firm’s first buy-sell agreement or you’re revisiting an existing buy-sell agreement, a properly drafted buy-sell agreement for an A/E firm should be self-executing and achieve certain objectives in order to reasonably assure the continuance of the firm. These objectives include providing for an orderly transfer of ownership upon certain triggering events (death, retirement, separation from service, etc.) and restricting transferability of ownership to those not employed by the firm. Your firm’s buy-sell agreement should also help create a market for existing and new owners to transfer ownership, and depending on the specific circumstances, the buy-sell agreement can also permit retention of control by existing owners, while still allowing new owners to purchase minority ownership interests.
Engage a Valuator
It’s usually wise to hire a valuation professional to perform a business valuation when drafting a buy-sell agreement. An initial valuation provides an estimate of the dollar amount to be transferred and will likely have an impact on certain provisions to be included (or excluded) from any proposed buy-sell agreement. The valuation should then be updated periodically as circumstances that could affect the value of the firm change. In fact, the specific method used to value your firm should be detailed in the buy-sell agreement itself and should be reviewed periodically by the firm’s owners.
One specific issue to consider is how the “standard” of value is defined. A business valuation expert can provide definitions for a variety of relevant standards — including fair market value, fair value, book value and investment value. Different triggering events or departing shareholders may require different levels or standards of value.
Customize Your Agreement
Having a standard, boilerplate buy-sell agreement can be just as dangerous as not having one at all, because its provisions may cause confusion or trigger disputes. Yours should be a customized, living document that provides a clear mechanism for an equitable ownership change.
If you need help reviewing the agreement you have in place or creating one if you have yet to do so, please contact any of the professionals at Dannible & McKee, LLP. Visit dmcpas.com to learn more.
