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PublishWillis Manning Modified over 9 years ago
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How to be a $uccessful Construction Financial Manager Knowledge. Resource. Opportunity.
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SHAREHOLDER AGREEMENTS A KEY ASPECT OF OWNERSHIP SUSTAINABILITY IN CLOSELY HELD CONSTRUCTION COMPANIES
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Jon Zeiler, CPA, Partner Crowe Horwath LLP Construction Services Leader Direct: 630.575.4237 jon.zeiler@crowehorwath.com TODAY’S PRESENTER Steve Andrews, CPA, Partner Crowe Horwath LLP Construction Services Leader - Tax Direct: 630.574.1647 steve.andrews@crowehorwath.com
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I.Overview II.Advantages and Risks III.Types of Buy-Sell Agreements IV.Typical Provisions V.Valuation, Payment Terms and Other Provisions VI.Q&A Session AGENDA
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Set Rules Governing Stock Ownership Plan for Contingencies – Death and Disability Plan for Voluntary or Involuntary Withdrawals Set Economics for Early Withdrawal OVERVIEW – PURPOSE OF AGREEMENT
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Treat People Fairly Respect Prior Commitments/Stock Deals Protect the Company (Golden Goose Theory) Balance Risk Between Exiting Owner(s) and Remaining Owners BASICS OF THOUGHT PROCESS/PHILOSOPHY
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Risks with No Buy-Sell Agreement Unwelcome business partner “Cousins in Chaos” Surviving spouse unwilling or ill-prepared to make decisions Attorneys are smiling Undesired economic outcome Advantages of Buy-Sell Agreements Guarantees a buyer for an asset which probably would not pay dividends to one’s heirs Spells out the terms of payment and can usually be fully funded with life and disability insurance, if desired Provides a smooth transition of complete control and ownership to those who are going to keep the business going Can establish a value for Federal Estate Tax purposes, which is binding on the IRS RISKS WITH NO BUY-SELL AGREEMENT/ADVANTAGES OF BUY-SELL AGREEMENTS
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1.Entity Plan: The partnership (or corporation) agrees to buy the interest of the deceased /former partner (or shareholder) TWO TYPES OF BUY-SELL AGREEMENTS Partnership or Corporation Partner/ Shareholder #2 Partner/ Shareholder #1 Partner/ Shareholder #3 buy-sell
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2.Cross Purchase Plan: The partners (or shareholders) agree to buy the interest of the deceased/former partner (or shareholder) TWO TYPES OF BUY-SELL AGREEMENTS Partner/ Shareholder #1 Partner/ Shareholder #3 buy-sell
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Restrictions on Transfer – General First option to purchase stock to Company Section option to purchase stock to shareholders (pro rata) If one shareholder declines, offer his share to others pro rata Time periods Tax implications – cost of basis shares BUY-SELL AGREEMENTS
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Specific Situations Death Disability Retirement Gifting among family – Allowable? Requirements? Voluntary withdrawal Involuntary withdrawal BUY-SELL AGREEMENTS
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Death Obligation of estate to sell Insurance funding must follow obligation – cross purchase vs. Company redemption Insurance proceeds > Purchase price Paid upon receipt Company keeps excess Insurance proceeds < Purchase price Promissory Note for balance Life insurance on owners Nearly always at full value BUY-SELL AGREEMENTS
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Disability Defining disability – Temporary disability – first 12 months Evaluation of Permanent Disability Ability to perform normal job duties Opinion of physician If permanently disabled, Company has the option obligation to purchase stock Full/value purchase price BUY-SELL AGREEMENTS
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Retirement Defining “retirement” Age plus years of service > 85 “Put” stock at 55 (Company must buy) “Call” stock at 60 (Company right to buy) Generally full value BUY-SELL AGREEMENTS
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“Cause” defined – ethics, felony, ‘material’ failure to perform duties, comply with Board, personal conduct, injurious to Company Offer but no obligation to buy Generally full price Offering owner may go to third party with any portion not purchased Company has the right to match third party offer Payment with Note by Company, all cash if bought by other owner TERMINATION WITHOUT CAUSE AND INVOLUNTARY TRANSFER
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Leaving owner generally much offer to sell to Company Generally some reduction in current value Possible restriction on payment, e.g., note payments delayed until a certain age Penalty on price is thought to be for doing something within ‘Cause’ definition or leaving the Company early (i.e., before Retirement) VOLUNTARY TERMINATION AND TERMINATION WITH CAUSE
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Net book value (owners’ equity) Formula based on earning (EBITDA and book value) Excludes life insurance proceeds Increase securities or real estate to FMV Include significant contingencies if >5% of equity Right of set-off against price for certain adjustments Certificate of agreed upon value – (with expiration) VALUATION CONSIDERATIONS
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Payment Terms 20% down Promissory Note for balance Promissory Note Terms Payment period – sliding scale based on size of note Fixed interest rate – Wall Street Journal prime rate Security for Note – Shares/Dividends paid on shares Aggregate limitation on payments to exiting owners on notes – e.g., 25% of cash flow Right of repayment BUY-SELL AGREEMENTS
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Non-compete, non-solicitation, confidentiality Salary continuation Benefits Release of guarantees and indemnification ANCILLARY PROVISIONS
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Drag Along and Tag Along Rights Possible retroactive adjustment of price for owners who exited earlier SALE OF COMPANY
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Jon Zeiler, CPA, Partner Crowe Horwath LLP Construction Services Leader Direct: 630.575.4237 jon.zeiler@crowehorwath.com QUESTIONS Steve Andrews, CPA, Partner Crowe Horwath LLP Construction Services Leader - Tax Direct: 630.574.1647 steve.andrews@crowehorwath.com THANK YOU!!!!
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