A lot of Buy Sell Agreements use a common valuation method called the “fixed price” method. It’s the easiest valuation method because the owners pick a number out of thin air and agree on a fixed value. The agreed on number determines the buy out price after a triggering event. Most Buy Sell Agreements state that the owners will review and update the value every year, but in reality few companies ever update the value.
People like Chris Mercer and me who understand how Buy Sell Agreements work or more often than not don’t work in the real world do not like fixed price valuation methods. Here are the reasons I do not recommend people use the fixed price valuation method:
- Unless the value is determined by an experienced appraiser the owners have no clue as to what the actual value of their company is. They are just guessing the company’s value. Do you really want your loved ones to be paid an amount for the company after your death that is based on a guess by a group of nonappraisers? The fixed value method always means that somebody is going to pay too much or too little and somebody else is going to be paid too much or too little.
- Once the value is agreed to and the Buy Sell Agreement signed, the chances are slim that the owners will review and revalue the company annually or whenever the value of the company changes significantly. See Chris Mercer’s article called “Fixed Price Buy-Sell Agreement Poster Child” in which he discusses a great bad example case where the owners of a company never updated the fixed price and it resulted in two lawsuits that took over ten years to resolve. The failure to update the value means that even if the original value was in the ball park the actual value of the company years later won’t even be close to the company’s real value.
- The Buy Sell Agreement needs to have an alternate valuation method that applies after a period of time such as one year, but many Buy Sell Agreements (not mine) lack this feature.
Buy Sell Agreement expert Chris Mercer says this about fixed price valuation methods:
“In my opinion, for most situations, fixed-price buy-sell agreements should be avoided like a contagious disease. However, if you have a fixed-price agreement, you must have the discipline to update the price periodically. And you must amend the agreement to include a workable appraisal process in the (likely) event that you fail to update it.”
If your Buy Sell Agreement has a fixed price valuation method I urge you to follow my advice listed below:
1. The owners must revalue the company not less than once a year and more often if something causes the value to increase or decrease substantially. It is not sufficient that the language of the agreement requires revaluations at least once a year. One or more owners must insist that all the owners actually revalue the company.
2. Make sure the Buy Sell Agreement has language that says: (i) the fixed price is eliminated after a period of time (such as one year) unless the owners agree that the price remains good or agree to a new price, and (ii) if the owners do not update the fixed price within the specified period the document contains a workable alternate valuation method.
3. Use an alternate valuation method that requires an experienced appraiser to determine the value as of the valuation date specified in the Buy Sell Agreement.
Hire the Keyts to Prepare a Buy Sell Agreement
We prepare Buy Sell Agreements custom drafted specifically to meet the desires of the members of Arizona LLCs. Our Buy Sell Agreement is the end result of Richard Keyt preparing this type of business agreement many times since practicing law in Arizona since 1980.We have three prices for our custom drafted Buy Sell Agreement. The prices are:
- $897 if we formed the LLC within the last 90 days
- $1,497 if we formed the LLC more than 90 days ago or if we did not form the LLC
- $1,394 if you purchase a Buy Sell Agreement for $897 and a new or amended Operating Agreement for $497.
Here’s the sequence of events when somebody hires us to prepare a Buy Sell Agreement for their Arizona LLC:
1. The purchaser completes and submits our online Buy Sell Agreement Questionnaire.
2. The purchaser pays for the Buy Sell Agreement with a credit card in our secure online store at one of the following links:
a. $897 Buy Sell Agreement Order Form if we formed the LLC within the last 90 days.
b. $1,497 Buy Sell Agreement Order Form if we formed the LLC more than 90 days ago or if we did not form the LLC.
c. $1,394 Buy Sell Agreement & Operating Agreement Order Form if we did not form the LLC and you are purchasing a Buy Sell Agreement and an Operating Agreement.
You can also pay by or by calling my legal assistant Emily Conrad - 480-664-7846 and giving your credit card information over the phone or by sending a check payable to KEYTLaw, LLC, 7373 E. Doubletree Ranch Road, Suite 165, Scottsdale, Arizona 85258.
3. After paying and completing our Questionnaire Richard Keyt will prepare the Buy Sell Agreement within 3 – 5 business days and email it to the LLC’s contact person along with a letter of explanation. These documents are in digital (pdf) format for distribution to all members for their review and input.
4. 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. The members can email their changes to Richard or call Richard at 480-664-7472 and schedule a phone conference or a conference at our office for Ricky to answer questions about the BSA and determine what changes, if any, the members want to make to the BSA. The BSA comes with one hour of attorney time to discuss the agreement with the members and modify it per the members’ instructions at the meeting. Attorney time incurred beyond one hour will be charged at $295/hour.
5. Richard C. Keyt will revise the Buy Sell Agreement and send it to the contact person as an Adobe pdf file for the signatures of the members. Ricky will also send a pdf version of the agreement that shows the changes we made to the first draft of the BSA.
6. Members can sign the agreement the old fashioned way or we can arrange for digital signatures for no additional cost.
We 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
Our 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 the Keyts to Form Your New LLC
To hire us to form your Arizona LLC compare the contents of our three LLC packages ($397 Bronze, $597 Silver & $997 Gold [the confidential LLC]) and complete our LLC Formation Questionnaire.