How to be a $uccessful Construction Financial Manager Knowledge. Resource. Opportunity.
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Transcript of How to be a $uccessful Construction Financial Manager Knowledge. Resource. Opportunity.
How to be a
$uccessful Construction Financial Manager
Knowledge. Resource. Opportunity.
SHAREHOLDER AGREEMENTS
A KEY ASPECT OF OWNERSHIP SUSTAINABILITY IN CLOSELY HELD
CONSTRUCTION COMPANIES
Jon Zeiler, CPA, Partner
Crowe Horwath LLP
Construction Services Leader
Direct: 630.575.4237
TODAY’S PRESENTER
Steve Andrews, CPA, Partner
Crowe Horwath LLP
Construction Services Leader - Tax
Direct: 630.574.1647
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
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
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
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
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 buy-sell
buy-sell
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
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
Specific Situations Death
Disability
Retirement
Gifting among family – Allowable? Requirements?
Voluntary withdrawal
Involuntary withdrawal
BUY-SELL AGREEMENTS
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
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
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
“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
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
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
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
Non-compete, non-solicitation, confidentiality
Salary continuation
Benefits
Release of guarantees and indemnification
ANCILLARY PROVISIONS
Drag Along and Tag Along Rights
Possible retroactive adjustment of price for owners who exited earlier
SALE OF COMPANY
Jon Zeiler, CPA, Partner
Crowe Horwath LLP
Construction Services Leader
Direct: 630.575.4237
QUESTIONS
Steve Andrews, CPA, Partner
Crowe Horwath LLP
Construction Services Leader - Tax
Direct: 630.574.1647
THANK YOU!!!!
