- I'd like to lead off by
having you answer one question

before Harry and John, you
begin to present on this topic.

I'd like to know what's the frequency

of which business owners come to you

and they either don't have a
buy sell agreement in place,

or they do and it's wholly
inadequate for the business.

- Harry or John?

- Oh, hold on. I just had to unmute.

So, so, so Nicola, it's a regular event.

So we were contacted
recently, actually, Dave,

from somebody from Vistage
here up in Michigan.

And a gentleman said, can you help me

with his employment contract

that he's going to be receiving?

And he's going to be a shareholder
in an S corporation.

So ver so this morning I received,

before our call today, the
proposed buy sell agreement.

And this will just get
into the meat of things.

We'll read one line, the appraised
value of the corporation.

The appraised value shall
be determined by the board

of the directors in its so discretion

based on re,

re reliable approved financial
statements, which means nothing.

So this executive thinks he's
coming in to an organization,

they, they say they're
going to give him the first

4% of the company.

They haven't even talked about the

taxes and what that means.

And the fact of the matter
is, this paper isn't worth it,

it's not worth anything to the individual

because the board of directors
could determine they want

to fire him in a year or two.

That the value of the company is zero

and this is the binding
agreement that you have.

So you have to be very,
very careful about reading,

actually reading these agreements

and actually working through examples.

So that's just one of a hundred, you know,

that we see all the time

that people really don't
pay attention to the detail.

Nicole also, you know,
mentioned, you know,

you're doing this at the
beginning of a relationship

or somebody coming in,

but remember these things need

to be looked at going down the road.

And what I mean by that is
companies kind of morph.

You might be one company today

and then all of a sudden you,

you've gone off in a little
bit of a different direction.

So the way you value the
company could be different.

So if you're a SaaS based based company,

you're going to be based on revenue.

But what if you weren't
a SaaS based company?

Originally you were just doing
research and development.

So it was more on the EBITDA formula.

So that those are the things that need

to be addressed on an ongoing basis.

And it's just like your
will and trust and,

and things of this nature.

The one thing we're not
going to talk today about is

because we have so many insurance experts,

is when do you bring
in insurance into your

buy sell agreements?

And that would not only be life insurance,

but it's also disability insurance.

We, I have personally found
disability is the hardest thing

to deal with in buy sell agreements.

And when someone does become
disabled because of a stroke

or whatever the case may be,

it's the most difficult for the business.

So long-winded answer Nicole,

but that's just kind of a start of this.

So John, can you pull
up our, your PowerPoint?

- Sure. I think I am
allowed to share here.

- You should be. I think
I made you a co-host,

so you should be also in
those, in those agreements.

We should, we should be defining

what a disability is, right Harry?

Absolutely. If you don't
define absolutely like you have

to define like specific, like

what specifically a disability is

because you know, if if
Nicola, you know, depending on

what time of the day Nico talks
to me, I could be, you know,

considered disabled if it's
later on in the day, especially

- Just for the record, we have tried

to have Harry declared
incompetent a number of times

and it just hasn't worked.

- That's not a joke, Dave.

They wanted to be the arbitrary of who,

who decides whether I was
competent to move forward.

That is no joke. Obviously
that part didn't go very far.

- What, what, so

before we get into the, the
PowerPoint, what is, so how,

how, how have you seen
partners agree on how

to define whether or not someone
is, is declared disabled?

Like how do, what have you seen be,

what's a good, a good measurement of that?

- Yeah, some of it's going to
be industry specific in our,

in our industry would be, you know,

you'd have like a chargeable hour

or can you actually take
care of your clients?

You know, there might be
some indication like that.

But if you had a SaaS company

or a manufacturing company,
you know, it might be different

where you just say, there are
two doctors that have to say

that you no longer can,
you know, continue on

with your, your duties.

But then the question becomes
is that, are you replaceable

and should you automatically
trigger a buyout

or can you still own part
of your stock going forward?

So you can actually handle
it in several different ways,

but you actually, your
Dave, your points right on,

you got to get all that
bait into the agreement

because things happen.

I mean, you know, this story,
you know, I had a gentleman

that I was working with

and you know, a young kid dropped a donut

and ran a red light and killed them.

Now that's, that's a
little easier on death,

but things do happen every day.

People have strokes all the time.

You know, we have more early
on dementia in our society.

So these are things that
are, you know, they're front

and center as you're dealing with the,

you know, the buy seller agree.

And, and if people don't
think this is true, it's,

it just happens all the time.

- And the best one thing
that I would add, I'm sorry,

is just clearly what Harry brought up is

that people will have a, a dual interest,

you have an interest
potentially as an employee

as well as an owner.

And those two sometimes
need to be separated,

other times they don't.

If somebody's terminated for,

cause you should have an automatic trigger

of a buyout on the buy sell

because if they're
obviously being terminated

for cause you really want

that person being your partner moving

forward in the business,

- Right? Yeah.

- The other, and there's times
like Harry said that, yeah,

because of say a physical
disability, they're no longer able

to perform services as an employee,

but that doesn't necessarily
mean you got to cut 'em out

as an owner of the business.

- The other thing that
I wanted you to address,

and then Kyle has a question

and then we'll get to
your, your PowerPoint is,

and I've seen this in in
firms that I'm working

with currently, is

that they put in a mandatory
retirement age, right?

And this is in a
professional services firm,

so they put in a mandatory retirement age,

and there's a clause in there

that says if this person is a partner,

their shares will be purchased at.

And a lot of professional
firms have a set price

for the shares, so they don't

to avoid the whole valuation issue, right?

So the, the the,

the firm will buy out
their shares at X dollars.

But with medical care these
days, no matter what you set

that mandatory retirement age
at the people are still sharp.

Even if you set it, you know, at a, at a,

at a relatively high level,

some people will still be sharp at

that relatively high level

and the firm will want to keep them.

So the, so the buy sell agreement has

to be adjusted accordingly.

And that's just another reason,

to your point about sitting down

and looking at these buy sell
agreements on an annual basis

and making adjustments to them.

You know, there's a, there's
a joke at one of the firms

that I work with and,

and there are people on this call

who will know this firm
very, very well, is

that the mandatory retirement
age keeps getting adjusted

every time the one of the
senior partners has a birthday.

So, you know, the triggering event,

if it's a mandatory retirement
age, I mean there, there's,

there should be language in there

that addresses that as well.

- And, and James and James to your point,

the one thing you got to
factor in now is, you know,

professions like our profession,
all that's kind of changed

with private equity coming in, you know,

so the question would be is
let's assume private equity

comes in and you're, you're a smaller firm

and they're rolling up, so you
sell out, let's say in a six

to eight EBITDA range, you
know, their ultimate goal is

to sell at 12 to 15.

So if you're a partner
and you're out three

or four years into the agreement,
what price should you get?

You know, so it's, it's,
there's a lot of maneuverability

and a lot of play in that.

- Yeah, for sure. All
right. Kyle has a question.

I want to take Kyle's question

and then we'll then we'll
turn it over to John Kyle.

- This was a comment more
on the disability side.

We've done this in the past,
use the actual policies,

but just bare minimum,

not even necessarily covering
disability like a true

disability, but a smallest
possible policy on all partners.

And the triggering language
is if the policy pays,

so then you, you've
shifted all the liability

for determining if they're
disabled onto the shoulders

of the insurance company and it can be a

$500 a month policy.

Like you're really just
offloading the argument

to the insurance company
for a very small amount

because that's the hardest, that's

for mental health and everything. Yeah,

- That's interesting.

It's a good point, Kyle,

because I, I think a lot

of times you might end up having a fight

amongst the partners of,
okay, how did, am I really

that disabled?

And you know, like we said, we fought

with Harry a number of times and

- Yeah, if you, if you can get
the insurance company declare

I'm disabled, then the rest
of the contract becomes valid.

- But Kyle, Kyle, are you
saying that you get the benefit

of having the group insured
rather than one person insured?

And then you can do it

- If you can get large group,

you can if you have enough partners,

otherwise you do individual policies.

The, the whole purpose, like
some of the partners might want

to have their income
insured with disability,

but in general you want a
policy on all of the partners,

even at the bare minimum, just

so you have a consistent standard

of this is the triggering
event for a disability.

So then like mental, because the mental

and depression one becomes the
hardest one to quantify now.

So if an insurance company
will actually pay for that,

well then they've got a pretty
damn good leg to stand on

that they're actually disabled

'cause they're, they're the
last ones that want to pay.

And you can get guaranteed issue too.

Lenny pointed that out enough
people you can get guaranteed

issued policies would help,
which help significantly.

- Hmm. All right. Okay John, take it away.

- Alright, I think we're
going to let Harry kick off.

You already did a heck of a
job of introducing this Dave,

so I don't think we need that first

slide to go through that.

Barry, why don't you kick us off?

Nicole kind of touched
on this as well, but

- Yeah, yeah, why?

Yeah, this is, you know, Nicola
really mentioned this, John,

let's just keep it going to the third one.

- Yep.
- Okay.

So understand in the form of the buy sell,

there are different ways
that people are bought out.

There could be a redemption agreement

where the actual entity is
buying out the interest,

which is different than the
other partners buying it out

through a cross purchase
agreement as since here,

the difference for that can
be substantial from a tax

standpoint and also could
be, you know, with respect to

who own ends up owning the business.

So if you had a redemption agreement,

everyone's going to go up
proportionately, you know, to

that whatever is being
redeemed where cross purchase,

if other shareholders have
the right to purchase a person

that was in a minority position,

let's assume there were four, you know,

or three 30%, 3% owners that one leaves.

If one can't afford to buy
out the other interest,

then you could be in a situation

where somebody who's on equal
grounds now actually owns

67% of the business.

So you got to be very careful
in how these things are worded

and what can be done and
things of this nature.

Now what we have seen in
those cases sometimes is

that everyone's there has to
be unanimity in certain types

of transactions

or certain things being
done at the firm in

order to mitigate that.

We have one new client
we brought in last fall,

very interesting.

They, they can only sell to each other.

However, if one wants to
take the company to market

and they can't get somebody to buy

or agree upon a price,
they have to liquidate

what they merged five years
ago, which makes no sense,

you know, so you got to be
really, really careful on

how these things are
worded, what could happen.

And then there's obviously
hybrid agreements

where you can do a redemption

and a cross purchase, you
know, give flexibility.

Those get a little complicated.

You probably want to have
some insurance on that.

John, you want to keep going?

- Yeah, I I just wanted

to add one thing on the
redemption agreement only

because it is a current issue.

It's up to the Supreme Court.

It was a estate tax issue of whether

or not corporate owned life insurance is,

should be included in the value
of the entity for purposes

of estate tax valuation.

So most of us would think
it's not, it's the value

of the operations of the business

that you're being bought out
at the IRS was challenging

that it should have included
the value of the insurance

that's going to be used
for the redemption.

So that's has made it all the
way up to the Supreme Court.

We're just waiting for
them to rule on that.

- Yeah, and that, and that's a, that's

a big issue out there.

I mean, how things are set
up toward the insurance

and all of about the insurance
experts here, you know,

it's called, I'm sure
you're aware of that.

But you know, the other thing
too, in all these transactions

and valuations and everything
else, remember the value

of all this too upon somebody's
death could impact their

estate because if they owned
a certain part of, you know,

of the company, they could
actually get, you know,

deferred taxes depending on
the size of their estate,

which we can get into
in another presentation.

So on valuation,

the stated price is
probably not a great place

to be for anyone.

That's where you actually
fix the price day one.

It's just not going, you
know, it's easy to apply,

but it's not going to
usually be reflective

of actual value if your
company's growing at all,

the market changes, you
know, multiples change

and is is listed here, not
appropriate for, you know,

for tax purposes.

So what's interesting here,
just in the state of price,

I'll get to something that's
a little offline here,

but when you have a closely held company,

let's assume it's all
owned by family members.

Those family members could be
brothers, sisters, sibling,

whatever the case may be.

And let's assume one of 'em passes

and there's a redemption agreement

and that redemption agreement
says you have to buy out

of a certain price

and let's just assume for
whatever case that it may be,

is they agree to a price
on the redemption and,

and you know, it gets paid

and at the same time they
want to issue stock to one

of the corporate executives
who's also a family member.

That valuation has to be
done at fair market value,

which could be completely
different than the value

that was redeemed out to
the other shareholder.

So you got to watch it, you
just can't take one agreement,

one value and use it for all purposes.

- So yeah, especially if if,
if that exit wasn't related

to death, 'cause arguably

that should have been
at fair market value.

But if somebody's just
redeeming shares pursuant

to a buy sell to a stated price

or formula, that doesn't
necessarily dictate what it should

otherwise be issued at to
somebody else as equity

because that is a fair
market value and and you're

otherwise dealing with valuation issues.

Compensation issues. Absolutely.

Those two are two

independent transactions
that need to be considered.

- John, how, how have you dealt
with this in your divorces,

in your marital divorces when
somebody had a stated price?

- Well, not surprisingly, the
business owner always wants

to argue that, you know,
I've got to buy sell,

I get bought out at a bucket share

and that should be the
value for divorce purposes.

Unfortunately, that doesn't
usually hold the case.

So a lot of it is going to
depend on the standard

of value in divorce based on
the state that you live in.

Illinois is a fair market value state.

So regardless of what the buy sell says,

because just like I stated
there not appropriate

for transfer tax purposes,
the IRS isn't bound

by a buy sell agreement.

They will acknowledge the
buy sell if it's reflective

or indicative of fair market value.

But the IRS isn't bound
by a buy sell generally

and divorce courts,

family law courts clearly
ignore buy, sell agreements.

That's not indicative In Michigan we have,

we don't have stated value,

but for professional service
firms we call it holder's

interest, which is pretty
much investment value value

to the owner, which again
isn't necessarily going to be

reflected in a buy sell agreement.

- Go next one John.
- Yep.

So in a formula based valuation, that's

where somebody just puts into
the agreement that it's going

to be three times EBITDA
or one times revenue.

Something that seems very
straightforward to apply.

Like I said, it's easy to
calculate, easy to communicate,

people can understand it,
anybody can read it and apply it.

But I, I listed as a pro,

but it's also a con is

that usually it reflects economic
value at the time it's put

into place given things have changed.

Harry mentioned that markets
have changed, you know, things

that used to be three
to five times ebitda.

EBITDA are now 10 to 12 times ebitda.

EBITDA or whatever it
is at the current time.

Dave, I think you

and had a post on
LinkedIn not too long ago

that says it's something

that's got to be looked
at on an annual basis.

You just can't put these things
on autopilot and just say,

because I have a formula, it's
going to move with the economy

and it's going to move with the market.

Not necessarily, you
know, earnings may change,

cash flow may change that's
going to impact the value,

but the multiple of what willing buyers,

willing sellers are willing
to pay with it for it,

that changes as well.

And you just can't put one
of these things on autopilot.

And so the third, which is
obviously the most accurate,

but it's also the most expensive

or time consuming, is to
have a third party valuation.

Shameless plug hire roky
corporate advisors in order

to the valuation for you.

You're going to ensure

that things are going to be
treated fairly at that point

because you will have a valuation

that's going to reflect
current economic values.

The issue that you're
going to come across though

with hiring a third party valuation of,

we've got a couple of things
it it just kind of this

with differences, you
know, Harry said the one,

it's going to be determined
by the board of directors.

Well obviously there might be
bias that's included in there.

Other times it'll say
that each of the parties

or the two shareholders
are each going to get their

own valuation.

What happens if they're far apart?

Sometimes they'll just say,

we'll take the average of the two.

I've seen others that have
said if they're within 20%

of each other then we'll take the average,

otherwise the two value, the
two independent evaluators have

to agree on a third and they'll go out

and do a, you know, a third valuation.

Things are starting to get
expensive here if you have

to pay, you know, and who's going to pay

for all these valuations?

The corporation, the, the
owner of the business.

And I will tell you, I've been
in this position, it's not

so easy as the two of us
coming up with that third party

of who's going to be, 'cause
we're all going to lobby

for something that's
going to push for our,

I'll say our professional opinion of

what we think it's worth.

So sometimes that third party, you know,

you could do baseball arbitration where

that third party just says,
I'm going to look at the two,

I'm not going to do a third, but
I'm going to say, which one do I

otherwise think is most reliable?

But just

because again you've got that third party,

it's not the easiest thing to do.

- So, so John, just one point

what you were talking about
is on the formula driven

and Sheldon will appreciate
this, is if, if John came up

with a 6% capitalization rate
and I came up with a seven

or 7.5% capitalization rate,
that could have a huge impact

on the value of the
underlying real estate.

So what, what it would
appear to be from the

outside a vary just a 1% change.

It's huge in the overall valuation.

So you've got to be, you know, careful

and that's what John was saying
is people can differ within

a certain range but it can
have a huge impact whether it's

for buy, sell or

or for estate planning.
Go on John. I'm sorry.

- Yeah, no that's fine. And so, you know,

Harriet had mentioned
language is important,

which is absolutely true.

So from a drafting perspective, a plea

to all the attorneys out there

that are drafting buy sell
agreements be very, very specific

and cognizant of the
language that you're using.

So one of the very first things
is everybody will throw out

fair market value.

Yes. Well we, we will
determine the fair market value

of the shares or of the unit.

From my perspective, fair
market value is a term of art.

It means something that means willing,

buyer, willing seller.

And if you're talking
about a minority interest,

then potentially subject to
discounts for lack of control

and lack of marketability.

The common one that I see a lot is

that the attorneys will
say fair market value.

By way of example, if the
company is worth $20 million

and it's a 10% interest
that's being redeemed,

then the value of the
shares is $2 million.

That's not fair market
value, that's fair value

'cause it didn't consider that
you have a minority interest

that could potentially
be subject to discounts.

So be very, very certain

and if you have any questions,
call a valuation person

to determine what is
it that we want to do.

A lot of times I will get an agreement

that it may not even have a stated value,

but it just says we're going to
get an independent valuation.

First question I ask the
attorneys is, what standard

of value do you want me to apply?

And they'll say, oh geez,
I never thought of that.

And end up, what I end
up doing is giving it

to 'em both fair value without discounts,

fair market value without discounts.

'cause obviously you're
going to see that depending on

what side you're on,

they're going to have an interest
in being the higher value

or the lower value.

I will leave it up to the
attorneys then to fight

that battle.

That shouldn't be our
battle as valuation people.

So yeah, I'll give you all
the information, you do

what you want with it,
but be careful with that.

Specifying the valuation date.

- I'm sure. John, I'm
fair market value though.

You and I both have seen agreements

where it's a fair market value

but there's no discount
for minority discounts.

So you still might do
marketability for the company

but not a minority discount.

Right?

- Well but like that example
that I gave where it says,

for example, fair market value
company is worth $20 million,

a 10% interest is $2 million.

I'm not sure what they
actually meant by that.

So yes, depending on what
discounts may be applicable.

If your example ignores
all discounts, did you mean

that it ignores all discounts

or was it implicitly included in the value

of $20 million that that's
already on a discounted basis?

It's unclear. So that's why I
am saying be absolutely clear

on what you mean and what you know.

And, and if you want,

because again, if you're doing this

for a buyout purposes, not necessarily

for estate tax purposes,

then you could have
whatever standard of value

or whatever discounts you want to applied

for purposes of that agreement.

You could say that we will
consider a discount for lack

of marketability, but not a
discount for lack of control

or vice versa.

The fact that you got to buy
sell almost would make it sound

like you've got a built-in
redemption agreement

where a discount for lack

of marketability then may be
somewhat neutered if there's

somebody ready, willing, and
able to redeem those shares.

But yes, you're absolutely correct in

that you could consider one none.

But be clear of what your intent on doing

the valuation date.

Just clear, what do you mean?
Is it the date of termination?

You know, the 30, you know, the end

of the month closest to it.

Just be clear. And then on formula based

- Evaluations, now on
valuation date, I've seen a lot

of agreements.

So let's assume you're in September

and I'll say if you do
anything during let's say 2024,

the valuation date is
the preceding year end.

Let's assume it was December 31st, 2023.

What, what do you do when
there's a significant event in

2024 where the business
went from one level

to substantially higher
during that time period?

You just see a lot of litigation on that

or what, what have you seen?

- Yeah, and it's something as
the evaluator if that we see

that you've got to make the
attorneys aware of that

because that's going to an issue.

I don't want to be in a
position where somebody says,

well why did you ignore that?

And the idea is if you've
got a certain valuation date,

so our standards say we
have to use everything

that was known or knowable
as of the valuation date.

If it was not known

or knowable, I can't include
that in my valuation.

So when somebody gives me a
very specific valuation date,

I need to be cognizant of that.

But I also can't turn a blind eye

and just let somebody, you
know, not let somebody know

of certain things that have
transpired since then that says,

Hey, I can't take this into consideration.

But be aware that say there's
been a huge uptick in this

industry in the last three
months that was not known

or knowable, but you may be underpaying

or overpaying for somebody's
interest because of that.

And then again, on the formula
based valuations, be clear of

what type or what level

or source of financial
information you're using for that.

Is it a gap basis financial statement

that could present a problem?

Because if the company doesn't

otherwise prepare gap basis financials,

now you're going to have to go out

and have a restatement of those financials

or a potential review or an
audit to comply with that.

If it's tax returns, Harry

and I are working on one right
now where those two are tied,

their internal financials
are accrual basis gap basis,

but they file their tax
returns on a cash basis

and there could be a
substantial difference

between those numbers.

So be cognitive of that.

Is it the last return

or financial statement closest
to the triggering event?

Are you implying the last,
the trailing 12 months?

So there's a lot of possibilities
that can be considered,

but be certain, be clear which one you're,

what you're intending on
using as part of that formula.

And again, some, just some
language that I've seen

that I've talked about
that creates some ambiguity

with respect to how it's going
to be according, you know,

this was the without discounts,
is that fair market value

or fail VA fair value.

This was the second
bullet always amazes me

'cause I've seen judges do this as well.

Evaluation done in accordance

with generally accepted
accounting PRI principles.

There is no such thing, there
is no valuation in accordance

with generally accepted
valuation principles.

You may be talking about a
fair value level of standard

that's used for financial
reporting purposes,

but GAP doesn't talk about what

a a valuation should look like.

And then valuation shall include goodwill.

Something that I'm dealing
with now on a couple cases,

enterprise versus personal goodwill, big,

big issue on a buyout.

You know, a buy and a sale
of a company, especially

with a C corp, it can be issue of whether

or not you've got too late, you know,

double taxation versus one level of tax

and how you're going to deal with that

with a potentially tying it
with a non-compete agreement

as well as the buy sell.

So if you're not talking about death,

but you're talking about a
triggering of it, excuse me,

because of termination, you
know, Nicole mentioned that,

you know, how are you
going to work going forward?

The the sister, brother
sister agreement to

that would be a non-compete agreement.

If you think that other
person would be able to

take business away from the
existing business, that's going

to create a, a lowering of
the value of the business.

And then just, you know, one of the things

that I always like to talk
about is the different

standards of value.

I I, I know it sounds nerdy,

but trust me, this is
really, really important

and people need to be cognizant of it.

So like giving you what those
definitions are general.

So when we talk about a standard
of value, we mean the value

to whom fair market value is
a hypothetical buyer seller.

Fair value is value to generally,

again, it could be for
financial reporting purposes

or under a dissenting shareholder

or shareholder oppression case.

That just means it's the value
of the company unaffected

by discounts

and investment value generally talks about

that value at the very highest level,

which is the value to
a particular purchaser.

Unlike fair market value,
which would be the value

to a hypothetical purchaser, all three

of those could produce a different value

depending on how you apply it.

So a lot of people like to say,

why do people care why you're doing this?

The value is the value is the value,

it's always going to be the same.

Absolutely not.

IRS is always going to
use fair market value.

That's the standard of value
for income tax purposes.

Estate tax, gift tax purposes,

fair value is generally a
legal standard under state law

that sometimes is going to ignore any sort

of discounts that would apply.

Investment value is

what we're using when
we're talking about exit

planning for a business.

It's trying to, the
highest value for somebody,

which is usually a sale
to a strategic buyer,

whether that be a competitor, a customer,

somebody else out there.

In certain instances it could
be a private equity firm

that they're building a platform

and it's their initial transaction

that they want to get into it.

So investment value

and fair market value could
be quite a wide distance

between it, but you need to be careful

and be certain of what you're
otherwise trying to apply.

- John Harry, let me ask you
a question along those lines.

Have you seen a buy, sell,

a poorly drafted buy sell
agreement be a hindrance

to the sale of a business?

- Yes.
- All right.

Explain so that this
is an important concept

for people to understand.

So explain how like poor buy
sell agreements will hurt

a business, the sale of
a business down the road.

And this is an important
concept for the folks,

particularly the professionals
who are here, who are,

who are advising people to understand.

- Yeah, because you can get
into a shareholders agreement

where somebody has the
right of first refusal

and maybe a right of first offer.

So if that comes up, then one,

one shareholder could actually
be tying up, you know,

the company where the company
really can't move forward,

you know, to from one one
of the shareholders to sell

or to actually sell the company

because they have their
own, you know, who, who gets

to offer what.

And you know, somebody could
actually manipulate those

provisions to buyout a partner
at let's say the, the formula

that John here was talking about,

but they're planning
to flip out the company

to another seller at a much higher level.

So those, those can be
very, very difficult.

The example I gave you earlier too,

where two companies merged,
you know, one's a minority,

one's a majority, you
know, they, they all have

to do things in humanity,

but can you imagine
trying to sell a company

that if the a sales process
doesn't go through it

to one satisfaction that they have

to liquidate the company and separate it.

I mean, somebody's going to ask
for that agreement to see it

because in many cases you
want the outside person

to buy your stock in these
companies for tax purposes

to maximize capital gains tax
and not ordinary income tax.

You don't be selling assets so

that actually come into play if they see

that they're going to know they
have a lot of negotiating room

with respect to the
potential purchase price.

So I think it's there all the
time, but John, why don't you,

- Yeah, and I I I'll put
the flip on it that says,

if you've got a stated redemption price

or a formula at a time
that that is greater than

what the market is, you've
got somebody that's going to,

if they're looking at this
buying this company says, geez,

I got to redeem, if somebody wants out,

I got to pay them more
than what I'm willing

to pay for the company.

That becomes a problem.

So somehow you need to address,

or they're going to be looking at that.

It should be part of the due
diligence on the acquisition is

inquiring what kind

of shareholder agreements do
you have out there currently

and what are those provisions?

Because yeah, it may cause a detriment

or somebody that says, well hell no,

if someone has the ability
to redeem their shares at

that high of a price

and get stuck with that
obligation, I don't want to assume

that obligation or I don't
want that potential based on

that given price. It's a problem.

- Yeah, no, it's an Im
it's an important point.

One more question along these lines,

and I've seen this again
in professional firms.

So you want to carve out, the
firm grows at a rapid pace,

you want to carve out 10% of the
ownership of the firm to sell

to a handful of up and
coming people, right?

And you're going to
allocate that, you know,

that portion based on whatever, you know,

whatever you decide is
going to be that, you know,

whatever formula you're going to use.

So you know, you get 2% of that 10%

and invests over this amount of time.

How, how do, how should

that be addressed in a buy sell agreement?

- Gotcha. From a valuation
perspective, Dave,

usually we would look
at fully diluted shares.

So assuming that that 10% has
already been allocated just

so somebody's not getting
a benefit or a detriment

because of the issuance of that.

So typically yes, we
would look at, you know,

especially if there's even
any options outstanding

with respect to the stock, again,

looking at the fully
diluted shares on that, that

they may not be in the money
at that point, you know,

they may be in the money but
not a hundred percent invested.

But we'd otherwise want to
take a look at that

to consider all possible
transactions to make sure

that somebody is again,

is getting the true fair market value

because on a, a sale of the company, yes,

they're going to also be looking
at that, which sometimes

these types of, you know,
allocations, whether it's be stock

or options get triggered on a trans,

on a triggering event as well.

So that, that's otherwise
needs to be considered.

- Okay, thank you.

- John, you want to just flip
through the next couple slides?

We have limited time.

- Yeah, just a, a a
again, where we are today,

when we're talking about selling

or with perspective,

valuing a particular
interest in a company,

not a hundred percent of the company,

if we're talking about a
hundred percent of the company,

we're talking about the
traditional control value versus

what we're now calling
strategic control value.

So strategic control value is

that investment value to
that one buyer that's willing

to pay the highest dollar amount

because there's a, there's
some sort of premium there.

They have something that the
company wants as compared

to a financial control
value, which is John, Dave,

Nicola, anybody else
Perry looking at saying,

this looks like a good investment,
it generates cash flow,

I want to invest in that company.

Once you get past that,

now you're talking about
the interest in the company,

which is a marketable minority.

So that one's going to have a
discount for lack of control

that says you can't control it,

but it's still a freely
marketable interest

public market type values.

Well, most privately held
companies don't trade at that.

You can't pick up the
phone, call your broker

and say, Hey, sell my stock
and you know, x, y, Z tool

and die company and get me my cash.

So therefore hypothetical
buyers are going to take into

consideration this
marketability discount that says

when am I going to receive the value

of whatever it is that I'm buying?

And obviously there's a lot of things

that impact it if you're considering

or if you're interested in the
things that are considered.

There's a case that we
use now called mandelbaum.

It was an estate tax case

and Judge RO identified what
we call the mandelbaum factors

that says these are the things
that we look at to determine

what, how marketable an interest is.

So you know, what industry,

your financial statement analysis,

is there a redemption agreement in place?

Do you make distributions
on a regular basis?

You know, there's seven, nine factors that

the tax court identified,

but they all come into play
in determining what level

of marketability discounts should apply.

- That's one John.
- Yep, that's,

that's basically the end of it.

I know we had a couple
comments and questions.

- Yeah, you know, John,

before, let me, let me
do Susan's comment first

and I'll ask Nicole to weigh in on

this so you know I can help.

Absolutely. You know, I can have to

- Listen to a webinar when we're done on

- This.

So we, we we, we've covered the,

we we touched on the FTC decision

in Chicago

and we didn't do it in New York,

I think we did it in Chicago and Miami.

So Nico, why don't you
read Susan's question

and then touch on that

and pitch it to the guys
if you need to afterwards.

- I would love to sooth asked
do you see the new FTC non

compete rules having any
impact on buyout agreements?

So let me start with this.

So the, the FTC rule banning
non-competes is actually

not effective just yet.

So it will be effective
we're targeting in September,

unless it is the, the actual enforcement

of the rule becomes stayed
by the current lawsuits

that are going through the court system.

They've asked for an injunction.

If that injunction is granted,

it could actually stay enforcement.

So we are waiting to see
when it will be effective.

So right now the rule's not in in place.

And to answer that specific
question, if the rule

as it is written becomes the law, then

that rule actually has
a carve out for the sale

of a business non-competes.

So what that means is if you
are selling your ownership

interest in a business

or substantially all of the
businesses operating assets,

then you are entitled to
have a non-compete in place

with respect to that business owner.

So the FTC has said we
are going to bless that

and that's actually in line with

where the case law has
fallen for decades, which is

that you are entitled to
extra protection when you are

dealing with a sale of a business.

Why? Because it is the
goodwill of that business.

It is everything that
has been put into it.

So the law will better protect

that when we're talking
about non-competes.

So with that, I am interested
to hear John Harry,

your thoughts on, you know, outside of

that specific exception, you
know, where you see, you know,

that new role having an
impact on these agreements?

- Yeah, I'll just weigh in quickly on the,

on the valuation side Nicole,

which is we have always looked
at non-competes as a way of,

or being indicative of personal goodwill

rather than enterprise goodwill.

If it's enterprise goodwill,
it belongs to the business

and it transfers with the business.

So if you're buying out somebody's
interest in the buy sell,

what you're going to be
concerned with is whether

or not there's any
personal goodwill that can,

otherwise you need to,
I don't want to say block

that makes it sound like
you're doing something illegal

but protecting the business
interest that says yes,

we understand you have
certain relationships,

you have certain knowledge that you could

otherwise take that's
going to harm the business.

We want to make sure that
that's going to be protected.

So along with that buy, sell

or on a sale of a business, if you see

that there's a non-compete
attached to it that's indicative

that somebody believes
that there's some element

of personal goodwill that
creates some income tax planning

opportunities because again,
you could structure it

as a sale of two bit

or two interests, one sale
of your personal goodwill,

which would be capital gain versus a sale

of whatever at the business
of enterprise goodwill.

If you're dealing with a C
corp now you got two levels

of taxation there.

Non-compete agreements
sometimes, you know,

we'll have a tie up provision

or a compensation agreement
where it's ordinary income,

but that's all sorts of tax planning.

But yes, if I see

that there's a non-compete
in a transaction, then yes

that tells me that
there's personal goodwill.

People that don't, aren't worried
about the departing owners

competing with them don't
usually enter into non-compete

agreements 'cause
there's nothing that they

otherwise have to pay to protect.

- Yeah, N Nicole, I I would
just say that I think it kind of

further drives home that if
the company has trade secrets

or processes all their ip,
make sure that's protected.

So if that person does
leave with a non-compete,

they can't utilize that information.

We've had a number of cases
where people just get up

and open up a new company
next door, you know,

they not only stole the data

but they're stealing
the ip, the process and,

and you know, trade secrets you have

to document a certain way.

So I would say that, you know,
it's going to force companies

to really look at their IP
differently if this new role does

come into place because that's usually

what your company has, right?

It's the IP about how you do things,

how you process them and
how you approach them.

So I think they have
much broader implications

and I would just say to
all the professionals here,

you should be talking to
your clients about how

to protect all that now.

So I mean who, who in the hell knows

how this case is going to come out?

- Yeah, the one thing
I would ask Nicole is,

'cause I heard somebody mention it,

that there is a difference,

and I don't know if they're
treated differently under the

FTC rule is a non-compete versus a

non-solicitation provision. Oh boy, here

- We go.

Yes, yes. So I'll give
you the short answer.

You, you're right John.

They are non-solicitation
clauses are going

to survive the rule.

So they are not impacted
by that rule so long

as they do not function as a non-compete.

Meaning if you write them so broad

that essentially you're
locking someone out from going

to another company and still
performing the same job, then

that's going to be
considered a unsolicited.

So generally speaking, they survive,

they are going to be treated different.

- Gotcha. Thank you.
- And what,

- What but the big car out,
I'm sorry Harry, go ahead.

- Go. No, I was going to say Nicola,
what if you have them base

that if you do do certain things

that you just then owe
the company X percent of

that business rather than
saying it's not a non-compete.

So it's a, you know, somebody
leaves, they take part

of the business and then they
have to pay you X percent,

- There's a financial penalty Yes

- For them there's a
financial penalty on it,

but you're allowing them to compete.

- Yeah, I, I, I mean in the
way you are describing it,

I don't see that being a problem.

So it really comes down to
like exactly what, how is that,

how is that written and
what is it actually doing?

So not just, you know, it's,

it's the function over the form here.

It's like, you know, what is
it actually intended to do

and what will it end up doing?

- Right? But you can I get
to kind of the same place,

not exact by, by putting
in those staple provisions.

- I, you know, I want
to, I want to highlight

what you said at the beginning
there Nicola too in that

that this is one of the
things that whatever you think

of this ruling and

however it proceeds, this
is one of the areas you said

that is carved out

where it absolutely does apply when

you go to sell a business. Correct?

- Correct, correct.

It's the one area where
the FTC is clearly blessed

and said this is going to be an exception.

- You know, and I spell that out

because as I'm sure none of
you would be shocked to hear

somebody who does this sort of
thing for a living was like,

oh there was just a thing
the FTC said non-competes.

And I'm like, nope, talk to Nala.

Completely applicable,
completely applicable here.

So, you know, misinformation,

bad information is way,

way worse than no information at all.

So, you know, and we could go on

and on about where you're
getting your facts from,

but always, always check with the experts

before opining on something like this

because there's things, you know, this

and the Corporate transparency
act are two things in the

last six months that have
been blatantly bastardized

and misquoted over and over again.

And, and I'm as guilty as anybody else.

Bill Byers and I had a
conversation about this last week,

so make sure you check with the experts

before opining on any
of this other questions

before we let John and
Harry off of the hot seat.

Okay. Nicole it to you.

- Okay. I just want to say thank you.

That was very informative Harry and John.

Really appreciate it. If I
could just highlight two things

that in particular to just really

allow that to stick with you.

It's make sure that you're
really focused on the details.

I mean, how much have we heard here today

that the details really matter

what you are putting into that agreement.

The more you think through it

and the more detail you
spell out in the agreement,

the less you leave to chance

or determination by whatever
the default laws are in the

jurisdiction where that agreement
is going to be operative.

So if you don't spell something out

how the valuation is going to occur

or what happens in the
event that you know,

one partner is no longer
part of that business,

or if it's something happens
in changes in the business

that you didn't account for
it, you default to state law.

So that may not be what the
partners contemplated the time

that they entered into this business.

It could be completely different

and you're stuck with that if it's

not spelled out in the agreement.

And the other thing I would
highlight again is just making

sure that's an organic
document, that it is living

and breathing and as that business changes

and shapes into something
different over time,

it should be addressed
in the agreement itself.

So definitely make sure
you're, you're working with,

with your, you know,
not only your attorneys

but valuation experts,
your accountants, you know,

those were, that
agreement touches on a lot

of different areas as we
heard insurance as well.

So you really ask those
questions to the professionals

that have the answers to those

as you're putting them together

so you have a really tight
agreement that makes sure

that everything's taken care of in the end

and there's a plan in place.

Thank you both again,
really appreciate it.

And at this point I will
turn it over to Dave

'cause we've gotten an interview coming up

with Sherry Jamay.