Fixing the Purchase Price
A very important task of the Buy Sell Agreement is to state how the purchase price will be calculated. The purchase price is a material term of the contract to purchase a membership interest. If the purchase price cannot be determined from the agreement, it will not be enforceable.
A Buy Sell Agreement may use one of several methods to determine the purchase price of a membership interest:
1. Stated Value Method. The members agree on the value of the LLC, they state the value in the Buy Sell Agreement. For example, if they agree the LLC has a value of $100,000 then the purchase price for the interest of a 40% member would be $40,000. Stated values also work well when the purchase involves the membership interest of a minority member who is an employee. If Jane purchased a 2% interest in the company for $2,000, the agreement might provide that the company will repurchase her interest for the same amount if she terminates her employment with the company. It is important that the members update the price regularly because the price always changes.
2. Formula Method. The members agree on a formula that computes the value of the company. For example, they might agree that the value of the company is: (i) the average of the net profits (defined in the agreement) of the LLC for its last three fiscal years multiplied by three, or (ii) two times book value.
3. Future Appraisal Method. The selling member and the company mutually select an appraiser to value the LLC, but if they cannot agree, each party selects an appraiser (and pays the cost thereof) and the value of the LLC is the average of the two appraisals unless the difference between the two appraisals is more than 15%. If the difference is too great, the two appraisers select a third appraiser (the cost is split) and the value determined by the third appraiser is the value if it is between the first two appraisals.
4. Single Appraiser – Select Now, Value Now Method. The company hires an experienced appraiser to value the company now. For more on this very important valuation method and why Richard only uses this method for companies that have substantial value read “The Single Appraiser, Select Now and Value Now buy-sell agreement valuation process is the one I recommend for most successful closely held and family businesses.”
There are other valuation methods. In fact, the Buy Sell Agreement I prepare for companies contains six different methods for determining the value of an interest is an Arizona LLC when there is a forced buy out. The members review the six proposed method and then tell me which method works best for them. Many times the members will also modify the valuation method they pick.
In my experience as an Arizona business lawyer who has been preparing Buy Sell Agreements for my clients since 1980, it is very rare for owners of a company to be able to agree on the stated value method or the formula method. I estimate that over 95% of the Buy Sell Agreement I have prepared use the appraisal method to determine the value of the company.
Mandatory Versus Optional Triggering Events
After the members decide which triggering events are needed for their LLC, they must then decide which events result in mandatory acquisitions and which events merely give the company and other members an option to purchase. Some triggering events such as termination of employment are almost always mandatory purchases. A Buy Sell Agreement that provides for mandatory purchases of the interest of a deceased member usually require that the company buy and the estate of the deceased member sell the interest of a deceased member. An excellent way to fund the purchase of the interest of a deceased member is for each member to purchase a life insurance policy on the life of the other members.
Terms and Conditions of the Purchase
Once a member becomes obligated to sell and the company or other members become obligated to buy, the Buy Sell Agreement sets the terms and conditions applicable to the sale. I can draft any terms and conditions that the members desire, but a common scenario is that: (i) the closing of the sale will occur within 60 days of the date the buyer becomes obligated to buy, (ii) at closing the buyer will pay not less than the greater of 20% of the purchase price or the amount of insurance on the life of a deceased member (not to exceed the purchase price), (iii) the balance of the purchase price will be evidenced by a promissory note signed by the buyer that provides for equally monthly payments of principal and interest over five years with interest to accrue at Bank of America prime, (iv) the continuing members of the LLC and their spouses must guaranty payment of the promissory note, and (v) the guaranties of the members are secured by pledges of their membership interests.
Richard Keyt’s Table of Contents of His Buy Sell Agreement
You cannot appreciate the important territory covered by my Buy Sell Agreement without reading its Table of Contents and LLC attorney Richard C. Keyt’s letter of explanation. You can see from the Table of Contents of my Buy Sell Agreement that the document is very comprehensive.
From my 40+ years of experience as an Arizona business lawyer who has formed thousands of companies, I recommend without exception that every multi-member LLC purchase my Buy Sell Agreement so the members can create an exit strategy in advance to minimize or eliminate the difficult company divorce that occurs with over half of all businesses. OK, there is one exception to the preceding recommendation – a multi-member LLC owned only by a husband and wife.
I also know from experience that if the members do not enter into a Buy Sell Agreement when they form the company, it is very unlikely that they will ever adopt the agreement. For new companies, time is of the essence. The members need to agree on their Buy Sell Agreement now or risk never having a BSA signed by the members.
Buy Sell Agreement Preparation Service
I prepare Buy Sell Agreements custom drafted specifically to meet the desires of the members of Arizona LLCs. My Buy Sell Agreement is the end result of preparing this type of business agreement many times since I first started practicing law in Arizona in 1980.
Here’s the sequence of events when somebody hires me to prepare a Buy Sell Agreement for their LLC:
1. Complete our online Buy Sell Agreement Questionnaire.
2. After paying and completing our Questionnaire Richard Keyt will prepare the Buy Sell Agreement and email it to the LLC’s contact person along with a letter of explanation.
3. Members review the Buy Sell Agreement, mark text to be changed and make a list of questions about provisions and additional issues to ask KEYTLaw business and contracts attorney and former CPA Richard C Keyt. Our Buy Sell Agreement comes with one hour of attorney time discussing it with the members and modifying it per the members’ instructions at the meeting. Attorney time incurred beyond one hour will be charged at $295/hour.
Our Fee to Prepare a Buy Sell Agreement
Our fee to prepare a custom Buy Sell Agreement is:
- $897 if we formed the LLC and the BSA is purchased within 90 days of its formation date, or
- $1,497 if we did not form the LLC or we formed the LLC, but the BSA is purchased more than 90 days after its formation date.
Our Buy Sell Agreement comes with one hour of attorney time discussing it with the members and modifying it per the members’ instructions at the meeting. Attorney time incurred beyond two hours will be charged at $295/hour.
Note: There is a $600 discount when we form the LLC and the BSA is purchased within 90 days of the formation date.
I constantly tell members of multi-member LLCs that the most important company document is the company’s Buy Sell Agreement because it is the only way to plan for the orderly future “divorce” of a member. Without a Buy Sell Agreement, the members are stuck with each other forever unless they are fortunate to agree on who will go, who will stay and how much, if any, the remaining members will pay the selling member.
Our Fee Includes Attorney Consultation & Revision Time
The fee includes one hour of attorney time conferring with members, modifying the agreement and drafting custom provisions. Few of our LLCs exceed the allotted attorney time to finalize their Buy Sell Agreement. We want the final agreement to contain all of the provisions desired by the members of each LLC. Some LLCs need more custom drafting of provisions for the Operating Agreement or need more conference time with members to discuss the agreement and make changes. We bill the LLC for any excess attorney time at $295 per hour.
How to Hire KEYTLaw to Prepare a Buy Sell Agreement
To hire us to prepare a custom Arizona LLC Buy Sell Agreement for $897 (if we formed or will form the LLC and 90 days have not elapsed since the LLC was formed) or $1,497 complete our online Buy Sell Agreement Questionnaire.
If You Want Richard Keyt to Form Your New LLC
To hire Richard Keyt to form your Arizona LLC compare the contents of our three LLC packages ($397 Bronze, $597 Silver & $997 Gold [the confidential LLC]).