By: Steve Ayers
As a former club owner and CFO, I feel one of the most overlooked business documents of a health club owner today is a Buy-Sell Agreement between the principles of the closely-held company. This document decides the fate of the business and ownership of said business upon a triggering event. Examples of triggering events include, but not limited to: retirement, divorce, death or bankruptcy of one or more of the company owners or members. The remaining owners or members want to make sure they control management and ownership without having the removed owners’ spouse or their heir(s) forced on them in a management or ownership role. For this Agreement to be effective and to not cause an undue burden on the company’s cash flow, it also must include a well-crafted vehicle for funding. Examples of funding vehicles for the Agreement include Life Insurance policies, installment payments or bank financing.
In my opinion, a well-crafted Agreement should achieve most, if not all of the following goals of the members or owners:
- Ensures the ownership interest of the departing member or owner is transferred to the remaining members or owners.
- Ensures that the departing member or owners’ heir(s) or spouse will be properly compensated for his or her ownership interest.
- Includes a proper formula for valuation of the ownership interest.
- Provides a vehicle for funding that benefits the heir(s) or spouse of the departing member or owner, while not causing undue duress on the company or the surviving members or owners.
- Defined list of triggering events.
- Addresses the sale to an unaffiliated party.
- Included cross purchase language, which requires the remaining owners or members to purchase or “buy out” the ownership of the departing member or owner, payable to their spouse or heir(s).
One of the most important parts of the Agreement, and the most widely overlooked portion, is the valuation of the departed member or owners’ interest. The valuation of the departed member or owners’ interest should be well defined in the Agreement. A few types of valuations are:
- Appraisals – The parties agree to a mutual appraiser or the average of three or four appraisers selected by the owners or members.
- Earnings – The parties agree to a multiplier of earnings or EBITDA average over the previous 3-5 years.
- Specific Value – The parties can establish a hard value of the business in the Agreement and the departing owner or managers’ heir(s) or spouse would be compensated based on the departing owners’ ownership percentage multiplied by the specific value.
I feel that that a Buy-Sell Agreement is one of the most important documents a company with multiple owners should have. It is very important to have this document well defined and written by an experienced attorney, which will also take into consideration the tax consequences of the remaining members and the estate planning of each member. I strongly recommend each business owner take a look at their business and seek legal advisement if you feel this type of Agreement would be beneficial to you and your organization.