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

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

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I'd like to know what's the frequency

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of which business owners come to you

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

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

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- Harry or John?

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

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

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So we were contacted
recently, actually, Dave,

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from somebody from Vistage
here up in Michigan.

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And a gentleman said, can you help me

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with his employment contract

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that he's going to be receiving?

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

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So ver so this morning I received,

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before our call today, the
proposed buy sell agreement.

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And this will just get
into the meat of things.

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

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The appraised value shall
be determined by the board

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of the directors in its so discretion

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based on re,

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re reliable approved financial
statements, which means nothing.

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

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

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4% of the company.

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They haven't even talked about the

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taxes and what that means.

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

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it's not worth anything to the individual

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because the board of directors
could determine they want

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to fire him in a year or two.

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That the value of the company is zero

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and this is the binding
agreement that you have.

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

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actually reading these agreements

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and actually working through examples.

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

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that we see all the time

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

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Nicole also, you know,
mentioned, you know,

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you're doing this at the
beginning of a relationship

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or somebody coming in,

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but remember these things need

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to be looked at going down the road.

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

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You might be one company today

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and then all of a sudden you,

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

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So the way you value the
company could be different.

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So if you're a SaaS based based company,

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you're going to be based on revenue.

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

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Originally you were just doing
research and development.

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So it was more on the EBITDA formula.

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So that those are the things that need

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to be addressed on an ongoing basis.

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

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and things of this nature.

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

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because we have so many insurance experts,

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is when do you bring
in insurance into your

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buy sell agreements?

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And that would not only be life insurance,

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but it's also disability insurance.

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We, I have personally found
disability is the hardest thing

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to deal with in buy sell agreements.

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And when someone does become
disabled because of a stroke

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or whatever the case may be,

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it's the most difficult for the business.

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So long-winded answer Nicole,

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

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

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

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

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

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We should, we should be defining

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what a disability is, right Harry?

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

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to define like specific, like

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what specifically a disability is

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

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

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

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- Just for the record, we have tried

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to have Harry declared
incompetent a number of times

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and it just hasn't worked.

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- That's not a joke, Dave.

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They wanted to be the arbitrary of who,

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who decides whether I was
competent to move forward.

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

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- What, what, so

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

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how, how have you seen
partners agree on how

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

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Like how do, what have you seen be,

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

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

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in our industry would be, you know,

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you'd have like a chargeable hour

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or can you actually take
care of your clients?

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You know, there might be
some indication like that.

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But if you had a SaaS company

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

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

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that you no longer can,
you know, continue on

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with your, your duties.

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But then the question becomes
is that, are you replaceable

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and should you automatically
trigger a buyout

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

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So you can actually handle
it in several different ways,

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

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you got to get all that
bait into the agreement

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because things happen.

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

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that I was working with

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and you know, a young kid dropped a donut

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and ran a red light and killed them.

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

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but things do happen every day.

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People have strokes all the time.

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

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

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and center as you're dealing with the,

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you know, the buy seller agree.

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

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it just happens all the time.

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

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is just clearly what Harry brought up is

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that people will have a, a dual interest,

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you have an interest
potentially as an employee

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as well as an owner.

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And those two sometimes
need to be separated,

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other times they don't.

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If somebody's terminated for,

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cause you should have an automatic trigger

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of a buyout on the buy sell

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because if they're
obviously being terminated

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for cause you really want

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that person being your partner moving

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forward in the business,

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- Right? Yeah.

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

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

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to perform services as an employee,

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

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as an owner of the business.

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- The other thing that
I wanted you to address,

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and then Kyle has a question

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

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

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with currently, is

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that they put in a mandatory
retirement age, right?

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And this is in a
professional services firm,

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so they put in a mandatory retirement age,

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and there's a clause in there

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that says if this person is a partner,

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their shares will be purchased at.

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And a lot of professional
firms have a set price

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for the shares, so they don't

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to avoid the whole valuation issue, right?

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So the, the the,

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the firm will buy out
their shares at X dollars.

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

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that mandatory retirement age
at the people are still sharp.

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

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at a relatively high level,

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some people will still be sharp at

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that relatively high level

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and the firm will want to keep them.

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So the, so the buy sell agreement has

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to be adjusted accordingly.

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And that's just another reason,

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to your point about sitting down

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and looking at these buy sell
agreements on an annual basis

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and making adjustments to them.

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

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that I work with and,

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and there are people on this call

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who will know this firm
very, very well, is

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that the mandatory retirement
age keeps getting adjusted

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

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So, you know, the triggering event,

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

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there should be language in there

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that addresses that as well.

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- And, and James and James to your point,

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

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00:07:59,030 --> 00:08:03,410
professions like our profession,
all that's kind of changed

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00:08:03,410 --> 00:08:05,930
with private equity coming in, you know,

191
00:08:05,930 --> 00:08:08,210
so the question would be is
let's assume private equity

192
00:08:08,210 --> 00:08:10,820
comes in and you're, you're a smaller firm

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00:08:10,820 --> 00:08:13,910
and they're rolling up, so you
sell out, let's say in a six

194
00:08:13,910 --> 00:08:18,080
to eight EBITDA range, you
know, their ultimate goal is

195
00:08:18,080 --> 00:08:19,610
to sell at 12 to 15.

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00:08:19,610 --> 00:08:22,400
So if you're a partner
and you're out three

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00:08:22,400 --> 00:08:25,760
or four years into the agreement,
what price should you get?

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00:08:25,760 --> 00:08:29,300
You know, so it's, it's,
there's a lot of maneuverability

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00:08:29,300 --> 00:08:31,190
and a lot of play in that.

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00:08:31,190 --> 00:08:33,740
- Yeah, for sure. All
right. Kyle has a question.

201
00:08:33,740 --> 00:08:35,090
I want to take Kyle's question

202
00:08:35,090 --> 00:08:37,250
and then we'll then we'll
turn it over to John Kyle.

203
00:08:37,250 --> 00:08:39,470
- This was a comment more
on the disability side.

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00:08:39,470 --> 00:08:43,160
We've done this in the past,
use the actual policies,

205
00:08:43,160 --> 00:08:44,870
but just bare minimum,

206
00:08:44,870 --> 00:08:47,960
not even necessarily covering
disability like a true

207
00:08:47,960 --> 00:08:52,190
disability, but a smallest
possible policy on all partners.

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00:08:52,190 --> 00:08:55,140
And the triggering language
is if the policy pays,

209
00:08:55,140 --> 00:08:57,390
so then you, you've
shifted all the liability

210
00:08:57,390 --> 00:09:00,900
for determining if they're
disabled onto the shoulders

211
00:09:00,900 --> 00:09:03,240
of the insurance company and it can be a

212
00:09:03,240 --> 00:09:04,950
$500 a month policy.

213
00:09:04,950 --> 00:09:07,710
Like you're really just
offloading the argument

214
00:09:07,710 --> 00:09:10,115
to the insurance company
for a very small amount

215
00:09:10,115 --> 00:09:12,465
because that's the hardest, that's

216
00:09:13,650 --> 00:09:15,870
for mental health and everything. Yeah,

217
00:09:15,870 --> 00:09:16,870
- That's interesting.

218
00:09:16,870 --> 00:09:17,703
It's a good point, Kyle,

219
00:09:17,703 --> 00:09:18,600
because I, I think a lot

220
00:09:18,600 --> 00:09:20,370
of times you might end up having a fight

221
00:09:20,370 --> 00:09:24,000
amongst the partners of,
okay, how did, am I really

222
00:09:24,000 --> 00:09:25,020
that disabled?

223
00:09:25,020 --> 00:09:27,660
And you know, like we said, we fought

224
00:09:27,660 --> 00:09:29,310
with Harry a number of times and

225
00:09:29,310 --> 00:09:31,920
- Yeah, if you, if you can get
the insurance company declare

226
00:09:31,920 --> 00:09:34,650
I'm disabled, then the rest
of the contract becomes valid.

227
00:09:35,670 --> 00:09:38,280
- But Kyle, Kyle, are you
saying that you get the benefit

228
00:09:38,280 --> 00:09:42,330
of having the group insured
rather than one person insured?

229
00:09:42,330 --> 00:09:44,100
And then you can do it

230
00:09:44,100 --> 00:09:45,330
- If you can get large group,

231
00:09:45,330 --> 00:09:46,950
you can if you have enough partners,

232
00:09:46,950 --> 00:09:48,785
otherwise you do individual policies.

233
00:09:48,785 --> 00:09:52,500
The, the whole purpose, like
some of the partners might want

234
00:09:52,500 --> 00:09:55,980
to have their income
insured with disability,

235
00:09:55,980 --> 00:09:59,850
but in general you want a
policy on all of the partners,

236
00:09:59,850 --> 00:10:02,070
even at the bare minimum, just

237
00:10:02,070 --> 00:10:05,070
so you have a consistent standard

238
00:10:05,070 --> 00:10:08,220
of this is the triggering
event for a disability.

239
00:10:08,220 --> 00:10:10,380
So then like mental, because the mental

240
00:10:10,380 --> 00:10:13,950
and depression one becomes the
hardest one to quantify now.

241
00:10:13,950 --> 00:10:17,310
So if an insurance company
will actually pay for that,

242
00:10:17,310 --> 00:10:19,920
well then they've got a pretty
damn good leg to stand on

243
00:10:19,920 --> 00:10:21,300
that they're actually disabled

244
00:10:21,300 --> 00:10:24,030
'cause they're, they're the
last ones that want to pay.

245
00:10:24,990 --> 00:10:26,880
And you can get guaranteed issue too.

246
00:10:26,880 --> 00:10:29,700
Lenny pointed that out enough
people you can get guaranteed

247
00:10:29,700 --> 00:10:32,670
issued policies would help,
which help significantly.

248
00:10:32,670 --> 00:10:36,990
- Hmm. All right. Okay John, take it away.

249
00:10:38,130 --> 00:10:40,320
- Alright, I think we're
going to let Harry kick off.

250
00:10:41,190 --> 00:10:44,070
You already did a heck of a
job of introducing this Dave,

251
00:10:44,070 --> 00:10:45,660
so I don't think we need that first

252
00:10:45,660 --> 00:10:46,890
slide to go through that.

253
00:10:48,330 --> 00:10:49,590
Barry, why don't you kick us off?

254
00:10:49,590 --> 00:10:52,355
Nicole kind of touched
on this as well, but

255
00:10:52,355 --> 00:10:53,370
- Yeah, yeah, why?

256
00:10:53,370 --> 00:10:55,860
Yeah, this is, you know, Nicola
really mentioned this, John,

257
00:10:55,860 --> 00:10:58,050
let's just keep it going to the third one.

258
00:10:58,050 --> 00:11:00,960
- Yep.
- Okay.

259
00:11:00,960 --> 00:11:03,900
So understand in the form of the buy sell,

260
00:11:03,900 --> 00:11:06,840
there are different ways
that people are bought out.

261
00:11:06,840 --> 00:11:08,550
There could be a redemption agreement

262
00:11:08,550 --> 00:11:12,330
where the actual entity is
buying out the interest,

263
00:11:12,330 --> 00:11:16,380
which is different than the
other partners buying it out

264
00:11:16,380 --> 00:11:19,110
through a cross purchase
agreement as since here,

265
00:11:19,110 --> 00:11:22,080
the difference for that can
be substantial from a tax

266
00:11:22,080 --> 00:11:26,940
standpoint and also could
be, you know, with respect to

267
00:11:26,940 --> 00:11:28,560
who own ends up owning the business.

268
00:11:28,560 --> 00:11:30,780
So if you had a redemption agreement,

269
00:11:30,780 --> 00:11:34,020
everyone's going to go up
proportionately, you know, to

270
00:11:34,020 --> 00:11:37,020
that whatever is being
redeemed where cross purchase,

271
00:11:37,020 --> 00:11:40,710
if other shareholders have
the right to purchase a person

272
00:11:40,710 --> 00:11:42,630
that was in a minority position,

273
00:11:42,630 --> 00:11:44,970
let's assume there were four, you know,

274
00:11:44,970 --> 00:11:48,330
or three 30%, 3% owners that one leaves.

275
00:11:48,330 --> 00:11:51,660
If one can't afford to buy
out the other interest,

276
00:11:51,660 --> 00:11:53,560
then you could be in a situation

277
00:11:53,560 --> 00:11:56,980
where somebody who's on equal
grounds now actually owns

278
00:11:56,980 --> 00:11:58,960
67% of the business.

279
00:11:58,960 --> 00:12:02,110
So you got to be very careful
in how these things are worded

280
00:12:02,110 --> 00:12:04,750
and what can be done and
things of this nature.

281
00:12:04,750 --> 00:12:08,260
Now what we have seen in
those cases sometimes is

282
00:12:08,260 --> 00:12:13,260
that everyone's there has to
be unanimity in certain types

283
00:12:13,270 --> 00:12:15,280
of transactions

284
00:12:15,280 --> 00:12:17,440
or certain things being
done at the firm in

285
00:12:17,440 --> 00:12:19,270
order to mitigate that.

286
00:12:19,270 --> 00:12:22,240
We have one new client
we brought in last fall,

287
00:12:22,240 --> 00:12:23,440
very interesting.

288
00:12:24,310 --> 00:12:26,860
They, they can only sell to each other.

289
00:12:26,860 --> 00:12:31,330
However, if one wants to
take the company to market

290
00:12:31,330 --> 00:12:33,730
and they can't get somebody to buy

291
00:12:33,730 --> 00:12:37,180
or agree upon a price,
they have to liquidate

292
00:12:37,180 --> 00:12:40,150
what they merged five years
ago, which makes no sense,

293
00:12:41,350 --> 00:12:43,690
you know, so you got to be
really, really careful on

294
00:12:43,690 --> 00:12:45,760
how these things are
worded, what could happen.

295
00:12:47,320 --> 00:12:49,090
And then there's obviously
hybrid agreements

296
00:12:49,090 --> 00:12:50,320
where you can do a redemption

297
00:12:50,320 --> 00:12:52,990
and a cross purchase, you
know, give flexibility.

298
00:12:52,990 --> 00:12:55,270
Those get a little complicated.

299
00:12:55,270 --> 00:12:57,190
You probably want to have
some insurance on that.

300
00:12:57,190 --> 00:12:58,420
John, you want to keep going?

301
00:12:58,420 --> 00:12:59,440
- Yeah, I I just wanted

302
00:12:59,440 --> 00:13:01,690
to add one thing on the
redemption agreement only

303
00:13:01,690 --> 00:13:04,300
because it is a current issue.

304
00:13:04,300 --> 00:13:05,680
It's up to the Supreme Court.

305
00:13:05,680 --> 00:13:08,140
It was a estate tax issue of whether

306
00:13:08,140 --> 00:13:11,590
or not corporate owned life insurance is,

307
00:13:11,590 --> 00:13:15,820
should be included in the value
of the entity for purposes

308
00:13:15,820 --> 00:13:18,040
of estate tax valuation.

309
00:13:18,040 --> 00:13:21,160
So most of us would think
it's not, it's the value

310
00:13:21,160 --> 00:13:22,840
of the operations of the business

311
00:13:22,840 --> 00:13:26,140
that you're being bought out
at the IRS was challenging

312
00:13:26,140 --> 00:13:28,600
that it should have included
the value of the insurance

313
00:13:28,600 --> 00:13:30,640
that's going to be used
for the redemption.

314
00:13:31,780 --> 00:13:34,600
So that's has made it all the
way up to the Supreme Court.

315
00:13:34,600 --> 00:13:37,750
We're just waiting for
them to rule on that.

316
00:13:37,750 --> 00:13:38,770
- Yeah, and that, and that's a, that's

317
00:13:38,770 --> 00:13:39,790
a big issue out there.

318
00:13:39,790 --> 00:13:41,710
I mean, how things are set
up toward the insurance

319
00:13:41,710 --> 00:13:44,380
and all of about the insurance
experts here, you know,

320
00:13:44,380 --> 00:13:47,110
it's called, I'm sure
you're aware of that.

321
00:13:47,110 --> 00:13:50,530
But you know, the other thing
too, in all these transactions

322
00:13:50,530 --> 00:13:53,530
and valuations and everything
else, remember the value

323
00:13:53,530 --> 00:13:57,220
of all this too upon somebody's
death could impact their

324
00:13:57,220 --> 00:14:00,520
estate because if they owned
a certain part of, you know,

325
00:14:00,520 --> 00:14:02,590
of the company, they could
actually get, you know,

326
00:14:02,590 --> 00:14:04,990
deferred taxes depending on
the size of their estate,

327
00:14:04,990 --> 00:14:07,360
which we can get into
in another presentation.

328
00:14:08,650 --> 00:14:10,750
So on valuation,

329
00:14:10,750 --> 00:14:13,180
the stated price is
probably not a great place

330
00:14:13,180 --> 00:14:14,260
to be for anyone.

331
00:14:15,370 --> 00:14:17,890
That's where you actually
fix the price day one.

332
00:14:18,910 --> 00:14:21,010
It's just not going, you
know, it's easy to apply,

333
00:14:21,010 --> 00:14:23,200
but it's not going to
usually be reflective

334
00:14:23,200 --> 00:14:26,080
of actual value if your
company's growing at all,

335
00:14:26,080 --> 00:14:29,080
the market changes, you
know, multiples change

336
00:14:30,280 --> 00:14:33,010
and is is listed here, not
appropriate for, you know,

337
00:14:33,010 --> 00:14:34,570
for tax purposes.

338
00:14:34,570 --> 00:14:38,050
So what's interesting here,
just in the state of price,

339
00:14:38,050 --> 00:14:40,360
I'll get to something that's
a little offline here,

340
00:14:40,360 --> 00:14:43,720
but when you have a closely held company,

341
00:14:43,720 --> 00:14:46,090
let's assume it's all
owned by family members.

342
00:14:46,090 --> 00:14:49,330
Those family members could be
brothers, sisters, sibling,

343
00:14:49,330 --> 00:14:51,080
whatever the case may be.

344
00:14:51,080 --> 00:14:53,000
And let's assume one of 'em passes

345
00:14:53,000 --> 00:14:55,100
and there's a redemption agreement

346
00:14:55,100 --> 00:14:57,290
and that redemption agreement
says you have to buy out

347
00:14:57,290 --> 00:14:58,640
of a certain price

348
00:14:58,640 --> 00:15:01,640
and let's just assume for
whatever case that it may be,

349
00:15:01,640 --> 00:15:05,360
is they agree to a price
on the redemption and,

350
00:15:05,360 --> 00:15:07,310
and you know, it gets paid

351
00:15:07,310 --> 00:15:10,700
and at the same time they
want to issue stock to one

352
00:15:10,700 --> 00:15:14,540
of the corporate executives
who's also a family member.

353
00:15:14,540 --> 00:15:19,100
That valuation has to be
done at fair market value,

354
00:15:19,100 --> 00:15:22,250
which could be completely
different than the value

355
00:15:22,250 --> 00:15:24,860
that was redeemed out to
the other shareholder.

356
00:15:24,860 --> 00:15:27,320
So you got to watch it, you
just can't take one agreement,

357
00:15:27,320 --> 00:15:30,740
one value and use it for all purposes.

358
00:15:30,740 --> 00:15:34,280
- So yeah, especially if if,
if that exit wasn't related

359
00:15:34,280 --> 00:15:36,080
to death, 'cause arguably

360
00:15:36,080 --> 00:15:37,880
that should have been
at fair market value.

361
00:15:37,880 --> 00:15:41,060
But if somebody's just
redeeming shares pursuant

362
00:15:41,060 --> 00:15:43,040
to a buy sell to a stated price

363
00:15:43,040 --> 00:15:47,270
or formula, that doesn't
necessarily dictate what it should

364
00:15:47,270 --> 00:15:50,870
otherwise be issued at to
somebody else as equity

365
00:15:50,870 --> 00:15:55,130
because that is a fair
market value and and you're

366
00:15:55,130 --> 00:15:57,290
otherwise dealing with valuation issues.

367
00:15:57,290 --> 00:15:59,720
Compensation issues. Absolutely.

368
00:15:59,720 --> 00:16:02,510
Those two are two

369
00:16:04,820 --> 00:16:08,480
independent transactions
that need to be considered.

370
00:16:08,480 --> 00:16:11,030
- John, how, how have you dealt
with this in your divorces,

371
00:16:11,030 --> 00:16:13,730
in your marital divorces when
somebody had a stated price?

372
00:16:16,190 --> 00:16:20,240
- Well, not surprisingly, the
business owner always wants

373
00:16:20,240 --> 00:16:23,120
to argue that, you know,
I've got to buy sell,

374
00:16:23,120 --> 00:16:25,370
I get bought out at a bucket share

375
00:16:25,370 --> 00:16:28,910
and that should be the
value for divorce purposes.

376
00:16:28,910 --> 00:16:32,150
Unfortunately, that doesn't
usually hold the case.

377
00:16:32,150 --> 00:16:34,700
So a lot of it is going to
depend on the standard

378
00:16:34,700 --> 00:16:38,210
of value in divorce based on
the state that you live in.

379
00:16:39,560 --> 00:16:42,440
Illinois is a fair market value state.

380
00:16:42,440 --> 00:16:44,960
So regardless of what the buy sell says,

381
00:16:44,960 --> 00:16:47,660
because just like I stated
there not appropriate

382
00:16:47,660 --> 00:16:51,320
for transfer tax purposes,
the IRS isn't bound

383
00:16:51,320 --> 00:16:53,270
by a buy sell agreement.

384
00:16:53,270 --> 00:16:57,290
They will acknowledge the
buy sell if it's reflective

385
00:16:57,290 --> 00:17:00,020
or indicative of fair market value.

386
00:17:00,020 --> 00:17:04,700
But the IRS isn't bound
by a buy sell generally

387
00:17:04,700 --> 00:17:05,960
and divorce courts,

388
00:17:05,960 --> 00:17:09,380
family law courts clearly
ignore buy, sell agreements.

389
00:17:09,380 --> 00:17:13,700
That's not indicative In Michigan we have,

390
00:17:13,700 --> 00:17:16,160
we don't have stated value,

391
00:17:16,160 --> 00:17:19,760
but for professional service
firms we call it holder's

392
00:17:19,760 --> 00:17:23,300
interest, which is pretty
much investment value value

393
00:17:23,300 --> 00:17:26,810
to the owner, which again
isn't necessarily going to be

394
00:17:26,810 --> 00:17:28,670
reflected in a buy sell agreement.

395
00:17:30,860 --> 00:17:32,570
- Go next one John.
- Yep.

396
00:17:36,380 --> 00:17:40,070
So in a formula based valuation, that's

397
00:17:40,070 --> 00:17:43,520
where somebody just puts into
the agreement that it's going

398
00:17:43,520 --> 00:17:48,520
to be three times EBITDA
or one times revenue.

399
00:17:48,780 --> 00:17:53,070
Something that seems very
straightforward to apply.

400
00:17:53,070 --> 00:17:56,430
Like I said, it's easy to
calculate, easy to communicate,

401
00:17:56,430 --> 00:17:59,670
people can understand it,
anybody can read it and apply it.

402
00:18:01,020 --> 00:18:03,180
But I, I listed as a pro,

403
00:18:03,180 --> 00:18:04,860
but it's also a con is

404
00:18:04,860 --> 00:18:09,180
that usually it reflects economic
value at the time it's put

405
00:18:09,180 --> 00:18:12,390
into place given things have changed.

406
00:18:12,390 --> 00:18:16,140
Harry mentioned that markets
have changed, you know, things

407
00:18:16,140 --> 00:18:18,360
that used to be three
to five times ebitda.

408
00:18:18,360 --> 00:18:21,090
EBITDA are now 10 to 12 times ebitda.

409
00:18:21,090 --> 00:18:23,670
EBITDA or whatever it
is at the current time.

410
00:18:24,810 --> 00:18:25,950
Dave, I think you

411
00:18:25,950 --> 00:18:28,650
and had a post on
LinkedIn not too long ago

412
00:18:28,650 --> 00:18:30,240
that says it's something

413
00:18:30,240 --> 00:18:33,660
that's got to be looked
at on an annual basis.

414
00:18:33,660 --> 00:18:37,230
You just can't put these things
on autopilot and just say,

415
00:18:37,230 --> 00:18:40,770
because I have a formula, it's
going to move with the economy

416
00:18:40,770 --> 00:18:42,420
and it's going to move with the market.

417
00:18:43,500 --> 00:18:47,370
Not necessarily, you
know, earnings may change,

418
00:18:47,370 --> 00:18:50,460
cash flow may change that's
going to impact the value,

419
00:18:50,460 --> 00:18:52,770
but the multiple of what willing buyers,

420
00:18:52,770 --> 00:18:55,590
willing sellers are willing
to pay with it for it,

421
00:18:55,590 --> 00:18:57,150
that changes as well.

422
00:18:57,150 --> 00:19:00,930
And you just can't put one
of these things on autopilot.

423
00:19:08,155 --> 00:19:12,720
And so the third, which is
obviously the most accurate,

424
00:19:12,720 --> 00:19:15,120
but it's also the most expensive

425
00:19:15,120 --> 00:19:19,680
or time consuming, is to
have a third party valuation.

426
00:19:21,570 --> 00:19:24,870
Shameless plug hire roky
corporate advisors in order

427
00:19:24,870 --> 00:19:26,700
to the valuation for you.

428
00:19:28,050 --> 00:19:29,070
You're going to ensure

429
00:19:29,070 --> 00:19:32,880
that things are going to be
treated fairly at that point

430
00:19:32,880 --> 00:19:35,340
because you will have a valuation

431
00:19:35,340 --> 00:19:38,460
that's going to reflect
current economic values.

432
00:19:40,830 --> 00:19:43,230
The issue that you're
going to come across though

433
00:19:43,230 --> 00:19:45,780
with hiring a third party valuation of,

434
00:19:50,670 --> 00:19:53,340
we've got a couple of things
it it just kind of this

435
00:19:54,750 --> 00:19:56,580
with differences, you
know, Harry said the one,

436
00:19:56,580 --> 00:19:59,220
it's going to be determined
by the board of directors.

437
00:19:59,220 --> 00:20:02,580
Well obviously there might be
bias that's included in there.

438
00:20:02,580 --> 00:20:05,940
Other times it'll say
that each of the parties

439
00:20:05,940 --> 00:20:08,010
or the two shareholders
are each going to get their

440
00:20:08,010 --> 00:20:09,750
own valuation.

441
00:20:09,750 --> 00:20:12,240
What happens if they're far apart?

442
00:20:12,240 --> 00:20:13,320
Sometimes they'll just say,

443
00:20:13,320 --> 00:20:15,000
we'll take the average of the two.

444
00:20:15,000 --> 00:20:19,410
I've seen others that have
said if they're within 20%

445
00:20:19,410 --> 00:20:21,780
of each other then we'll take the average,

446
00:20:21,780 --> 00:20:25,920
otherwise the two value, the
two independent evaluators have

447
00:20:25,920 --> 00:20:29,070
to agree on a third and they'll go out

448
00:20:29,070 --> 00:20:32,070
and do a, you know, a third valuation.

449
00:20:32,070 --> 00:20:34,260
Things are starting to get
expensive here if you have

450
00:20:34,260 --> 00:20:35,640
to pay, you know, and who's going to pay

451
00:20:35,640 --> 00:20:37,320
for all these valuations?

452
00:20:37,320 --> 00:20:40,710
The corporation, the, the
owner of the business.

453
00:20:42,210 --> 00:20:45,960
And I will tell you, I've been
in this position, it's not

454
00:20:45,960 --> 00:20:49,660
so easy as the two of us
coming up with that third party

455
00:20:49,660 --> 00:20:51,730
of who's going to be, 'cause
we're all going to lobby

456
00:20:51,730 --> 00:20:54,340
for something that's
going to push for our,

457
00:20:55,480 --> 00:20:57,040
I'll say our professional opinion of

458
00:20:57,040 --> 00:20:58,270
what we think it's worth.

459
00:20:59,950 --> 00:21:02,080
So sometimes that third party, you know,

460
00:21:02,080 --> 00:21:04,630
you could do baseball arbitration where

461
00:21:04,630 --> 00:21:07,000
that third party just says,
I'm going to look at the two,

462
00:21:07,000 --> 00:21:09,820
I'm not going to do a third, but
I'm going to say, which one do I

463
00:21:09,820 --> 00:21:13,720
otherwise think is most reliable?

464
00:21:13,720 --> 00:21:15,010
But just

465
00:21:15,010 --> 00:21:16,780
because again you've got that third party,

466
00:21:16,780 --> 00:21:19,120
it's not the easiest thing to do.

467
00:21:19,120 --> 00:21:20,440
- So, so John, just one point

468
00:21:20,440 --> 00:21:23,380
what you were talking about
is on the formula driven

469
00:21:23,380 --> 00:21:27,520
and Sheldon will appreciate
this, is if, if John came up

470
00:21:27,520 --> 00:21:31,360
with a 6% capitalization rate
and I came up with a seven

471
00:21:31,360 --> 00:21:35,800
or 7.5% capitalization rate,
that could have a huge impact

472
00:21:35,800 --> 00:21:37,600
on the value of the
underlying real estate.

473
00:21:38,470 --> 00:21:40,450
So what, what it would
appear to be from the

474
00:21:40,450 --> 00:21:43,930
outside a vary just a 1% change.

475
00:21:43,930 --> 00:21:46,150
It's huge in the overall valuation.

476
00:21:46,150 --> 00:21:47,860
So you've got to be, you know, careful

477
00:21:47,860 --> 00:21:51,280
and that's what John was saying
is people can differ within

478
00:21:51,280 --> 00:21:54,850
a certain range but it can
have a huge impact whether it's

479
00:21:54,850 --> 00:21:56,080
for buy, sell or

480
00:21:56,080 --> 00:21:59,140
or for estate planning.
Go on John. I'm sorry.

481
00:21:59,140 --> 00:22:01,030
- Yeah, no that's fine. And so, you know,

482
00:22:01,030 --> 00:22:03,010
Harriet had mentioned
language is important,

483
00:22:03,010 --> 00:22:04,810
which is absolutely true.

484
00:22:04,810 --> 00:22:08,410
So from a drafting perspective, a plea

485
00:22:08,410 --> 00:22:09,910
to all the attorneys out there

486
00:22:09,910 --> 00:22:14,260
that are drafting buy sell
agreements be very, very specific

487
00:22:14,260 --> 00:22:16,870
and cognizant of the
language that you're using.

488
00:22:16,870 --> 00:22:20,980
So one of the very first things
is everybody will throw out

489
00:22:20,980 --> 00:22:22,540
fair market value.

490
00:22:22,540 --> 00:22:25,690
Yes. Well we, we will
determine the fair market value

491
00:22:25,690 --> 00:22:27,760
of the shares or of the unit.

492
00:22:27,760 --> 00:22:31,600
From my perspective, fair
market value is a term of art.

493
00:22:32,440 --> 00:22:34,720
It means something that means willing,

494
00:22:34,720 --> 00:22:36,130
buyer, willing seller.

495
00:22:36,130 --> 00:22:39,010
And if you're talking
about a minority interest,

496
00:22:39,010 --> 00:22:42,130
then potentially subject to
discounts for lack of control

497
00:22:42,130 --> 00:22:44,260
and lack of marketability.

498
00:22:44,260 --> 00:22:47,020
The common one that I see a lot is

499
00:22:47,020 --> 00:22:50,410
that the attorneys will
say fair market value.

500
00:22:50,410 --> 00:22:55,240
By way of example, if the
company is worth $20 million

501
00:22:55,240 --> 00:22:58,360
and it's a 10% interest
that's being redeemed,

502
00:22:58,360 --> 00:23:02,170
then the value of the
shares is $2 million.

503
00:23:02,170 --> 00:23:05,320
That's not fair market
value, that's fair value

504
00:23:05,320 --> 00:23:08,890
'cause it didn't consider that
you have a minority interest

505
00:23:08,890 --> 00:23:11,980
that could potentially
be subject to discounts.

506
00:23:11,980 --> 00:23:13,990
So be very, very certain

507
00:23:13,990 --> 00:23:17,140
and if you have any questions,
call a valuation person

508
00:23:17,140 --> 00:23:19,990
to determine what is
it that we want to do.

509
00:23:19,990 --> 00:23:22,030
A lot of times I will get an agreement

510
00:23:22,030 --> 00:23:25,480
that it may not even have a stated value,

511
00:23:25,480 --> 00:23:28,420
but it just says we're going to
get an independent valuation.

512
00:23:28,420 --> 00:23:32,650
First question I ask the
attorneys is, what standard

513
00:23:32,650 --> 00:23:35,080
of value do you want me to apply?

514
00:23:35,080 --> 00:23:37,600
And they'll say, oh geez,
I never thought of that.

515
00:23:37,600 --> 00:23:40,420
And end up, what I end
up doing is giving it

516
00:23:40,420 --> 00:23:43,930
to 'em both fair value without discounts,

517
00:23:43,930 --> 00:23:46,100
fair market value without discounts.

518
00:23:46,100 --> 00:23:49,310
'cause obviously you're
going to see that depending on

519
00:23:49,310 --> 00:23:50,450
what side you're on,

520
00:23:50,450 --> 00:23:53,660
they're going to have an interest
in being the higher value

521
00:23:53,660 --> 00:23:55,730
or the lower value.

522
00:23:55,730 --> 00:23:57,860
I will leave it up to the
attorneys then to fight

523
00:23:57,860 --> 00:23:59,060
that battle.

524
00:23:59,060 --> 00:24:01,580
That shouldn't be our
battle as valuation people.

525
00:24:01,580 --> 00:24:05,000
So yeah, I'll give you all
the information, you do

526
00:24:05,000 --> 00:24:08,720
what you want with it,
but be careful with that.

527
00:24:08,720 --> 00:24:10,555
Specifying the valuation date.

528
00:24:10,555 --> 00:24:12,590
- I'm sure. John, I'm
fair market value though.

529
00:24:12,590 --> 00:24:14,270
You and I both have seen agreements

530
00:24:14,270 --> 00:24:16,190
where it's a fair market value

531
00:24:16,190 --> 00:24:19,280
but there's no discount
for minority discounts.

532
00:24:19,280 --> 00:24:22,220
So you still might do
marketability for the company

533
00:24:22,220 --> 00:24:23,600
but not a minority discount.

534
00:24:23,600 --> 00:24:25,160
Right?

535
00:24:25,160 --> 00:24:28,550
- Well but like that example
that I gave where it says,

536
00:24:28,550 --> 00:24:32,390
for example, fair market value
company is worth $20 million,

537
00:24:32,390 --> 00:24:34,910
a 10% interest is $2 million.

538
00:24:35,840 --> 00:24:38,390
I'm not sure what they
actually meant by that.

539
00:24:38,390 --> 00:24:43,010
So yes, depending on what
discounts may be applicable.

540
00:24:43,010 --> 00:24:46,790
If your example ignores
all discounts, did you mean

541
00:24:46,790 --> 00:24:48,530
that it ignores all discounts

542
00:24:48,530 --> 00:24:52,280
or was it implicitly included in the value

543
00:24:52,280 --> 00:24:56,900
of $20 million that that's
already on a discounted basis?

544
00:24:56,900 --> 00:25:00,475
It's unclear. So that's why I
am saying be absolutely clear

545
00:25:00,475 --> 00:25:02,425
on what you mean and what you know.

546
00:25:02,425 --> 00:25:04,130
And, and if you want,

547
00:25:04,130 --> 00:25:07,130
because again, if you're doing this

548
00:25:07,130 --> 00:25:10,010
for a buyout purposes, not necessarily

549
00:25:10,010 --> 00:25:12,440
for estate tax purposes,

550
00:25:12,440 --> 00:25:15,650
then you could have
whatever standard of value

551
00:25:15,650 --> 00:25:18,320
or whatever discounts you want to applied

552
00:25:18,320 --> 00:25:19,910
for purposes of that agreement.

553
00:25:19,910 --> 00:25:23,210
You could say that we will
consider a discount for lack

554
00:25:23,210 --> 00:25:26,030
of marketability, but not a
discount for lack of control

555
00:25:26,030 --> 00:25:27,110
or vice versa.

556
00:25:28,130 --> 00:25:30,800
The fact that you got to buy
sell almost would make it sound

557
00:25:30,800 --> 00:25:34,340
like you've got a built-in
redemption agreement

558
00:25:34,340 --> 00:25:35,810
where a discount for lack

559
00:25:35,810 --> 00:25:38,660
of marketability then may be
somewhat neutered if there's

560
00:25:38,660 --> 00:25:42,200
somebody ready, willing, and
able to redeem those shares.

561
00:25:42,200 --> 00:25:44,930
But yes, you're absolutely correct in

562
00:25:44,930 --> 00:25:48,110
that you could consider one none.

563
00:25:49,190 --> 00:25:51,350
But be clear of what your intent on doing

564
00:25:52,640 --> 00:25:54,290
the valuation date.

565
00:25:54,290 --> 00:25:58,850
Just clear, what do you mean?
Is it the date of termination?

566
00:25:58,850 --> 00:26:00,560
You know, the 30, you know, the end

567
00:26:00,560 --> 00:26:02,630
of the month closest to it.

568
00:26:02,630 --> 00:26:05,900
Just be clear. And then on formula based

569
00:26:05,900 --> 00:26:07,790
- Evaluations, now on
valuation date, I've seen a lot

570
00:26:07,790 --> 00:26:09,550
of agreements.

571
00:26:09,550 --> 00:26:10,880
So let's assume you're in September

572
00:26:10,880 --> 00:26:14,690
and I'll say if you do
anything during let's say 2024,

573
00:26:14,690 --> 00:26:18,140
the valuation date is
the preceding year end.

574
00:26:18,140 --> 00:26:21,620
Let's assume it was December 31st, 2023.

575
00:26:23,060 --> 00:26:25,520
What, what do you do when
there's a significant event in

576
00:26:25,520 --> 00:26:28,790
2024 where the business
went from one level

577
00:26:28,790 --> 00:26:31,790
to substantially higher
during that time period?

578
00:26:31,790 --> 00:26:33,440
You just see a lot of litigation on that

579
00:26:33,440 --> 00:26:35,300
or what, what have you seen?

580
00:26:35,300 --> 00:26:38,390
- Yeah, and it's something as
the evaluator if that we see

581
00:26:38,390 --> 00:26:41,840
that you've got to make the
attorneys aware of that

582
00:26:41,840 --> 00:26:44,520
because that's going to an issue.

583
00:26:44,520 --> 00:26:46,770
I don't want to be in a
position where somebody says,

584
00:26:46,770 --> 00:26:48,750
well why did you ignore that?

585
00:26:48,750 --> 00:26:53,750
And the idea is if you've
got a certain valuation date,

586
00:26:54,060 --> 00:26:56,790
so our standards say we
have to use everything

587
00:26:56,790 --> 00:27:01,560
that was known or knowable
as of the valuation date.

588
00:27:01,560 --> 00:27:03,480
If it was not known

589
00:27:03,480 --> 00:27:07,500
or knowable, I can't include
that in my valuation.

590
00:27:07,500 --> 00:27:11,640
So when somebody gives me a
very specific valuation date,

591
00:27:11,640 --> 00:27:14,280
I need to be cognizant of that.

592
00:27:14,280 --> 00:27:16,320
But I also can't turn a blind eye

593
00:27:16,320 --> 00:27:20,820
and just let somebody, you
know, not let somebody know

594
00:27:20,820 --> 00:27:24,600
of certain things that have
transpired since then that says,

595
00:27:24,600 --> 00:27:27,360
Hey, I can't take this into consideration.

596
00:27:27,360 --> 00:27:31,320
But be aware that say there's
been a huge uptick in this

597
00:27:31,320 --> 00:27:35,700
industry in the last three
months that was not known

598
00:27:35,700 --> 00:27:38,700
or knowable, but you may be underpaying

599
00:27:38,700 --> 00:27:41,190
or overpaying for somebody's
interest because of that.

600
00:27:44,190 --> 00:27:48,030
And then again, on the formula
based valuations, be clear of

601
00:27:48,030 --> 00:27:49,980
what type or what level

602
00:27:49,980 --> 00:27:54,180
or source of financial
information you're using for that.

603
00:27:55,530 --> 00:27:58,110
Is it a gap basis financial statement

604
00:27:59,130 --> 00:28:00,330
that could present a problem?

605
00:28:00,330 --> 00:28:01,650
Because if the company doesn't

606
00:28:01,650 --> 00:28:04,890
otherwise prepare gap basis financials,

607
00:28:04,890 --> 00:28:06,390
now you're going to have to go out

608
00:28:06,390 --> 00:28:08,880
and have a restatement of those financials

609
00:28:08,880 --> 00:28:11,970
or a potential review or an
audit to comply with that.

610
00:28:13,290 --> 00:28:15,480
If it's tax returns, Harry

611
00:28:15,480 --> 00:28:18,900
and I are working on one right
now where those two are tied,

612
00:28:18,900 --> 00:28:23,580
their internal financials
are accrual basis gap basis,

613
00:28:23,580 --> 00:28:27,240
but they file their tax
returns on a cash basis

614
00:28:27,240 --> 00:28:29,670
and there could be a
substantial difference

615
00:28:29,670 --> 00:28:31,290
between those numbers.

616
00:28:31,290 --> 00:28:33,000
So be cognitive of that.

617
00:28:34,440 --> 00:28:35,910
Is it the last return

618
00:28:35,910 --> 00:28:39,060
or financial statement closest
to the triggering event?

619
00:28:39,060 --> 00:28:42,990
Are you implying the last,
the trailing 12 months?

620
00:28:42,990 --> 00:28:46,680
So there's a lot of possibilities
that can be considered,

621
00:28:46,680 --> 00:28:49,230
but be certain, be clear which one you're,

622
00:28:49,230 --> 00:28:52,230
what you're intending on
using as part of that formula.

623
00:28:56,910 --> 00:29:01,020
And again, some, just some
language that I've seen

624
00:29:01,020 --> 00:29:04,320
that I've talked about
that creates some ambiguity

625
00:29:04,320 --> 00:29:06,660
with respect to how it's going
to be according, you know,

626
00:29:06,660 --> 00:29:10,200
this was the without discounts,
is that fair market value

627
00:29:10,200 --> 00:29:12,210
or fail VA fair value.

628
00:29:13,290 --> 00:29:16,140
This was the second
bullet always amazes me

629
00:29:16,140 --> 00:29:18,060
'cause I've seen judges do this as well.

630
00:29:19,530 --> 00:29:21,420
Evaluation done in accordance

631
00:29:21,420 --> 00:29:25,020
with generally accepted
accounting PRI principles.

632
00:29:25,020 --> 00:29:28,410
There is no such thing, there
is no valuation in accordance

633
00:29:28,410 --> 00:29:31,080
with generally accepted
valuation principles.

634
00:29:32,280 --> 00:29:36,300
You may be talking about a
fair value level of standard

635
00:29:36,300 --> 00:29:39,270
that's used for financial
reporting purposes,

636
00:29:39,270 --> 00:29:42,730
but GAP doesn't talk about what

637
00:29:43,660 --> 00:29:45,820
a a valuation should look like.

638
00:29:45,820 --> 00:29:49,210
And then valuation shall include goodwill.

639
00:29:49,210 --> 00:29:52,180
Something that I'm dealing
with now on a couple cases,

640
00:29:52,180 --> 00:29:56,530
enterprise versus personal goodwill, big,

641
00:29:56,530 --> 00:29:58,570
big issue on a buyout.

642
00:29:58,570 --> 00:30:01,990
You know, a buy and a sale
of a company, especially

643
00:30:01,990 --> 00:30:04,300
with a C corp, it can be issue of whether

644
00:30:04,300 --> 00:30:07,420
or not you've got too late, you know,

645
00:30:07,420 --> 00:30:10,540
double taxation versus one level of tax

646
00:30:10,540 --> 00:30:12,250
and how you're going to deal with that

647
00:30:12,250 --> 00:30:15,880
with a potentially tying it
with a non-compete agreement

648
00:30:15,880 --> 00:30:16,990
as well as the buy sell.

649
00:30:16,990 --> 00:30:18,670
So if you're not talking about death,

650
00:30:18,670 --> 00:30:21,790
but you're talking about a
triggering of it, excuse me,

651
00:30:21,790 --> 00:30:26,230
because of termination, you
know, Nicole mentioned that,

652
00:30:26,230 --> 00:30:28,810
you know, how are you
going to work going forward?

653
00:30:30,130 --> 00:30:32,500
The the sister, brother
sister agreement to

654
00:30:32,500 --> 00:30:35,020
that would be a non-compete agreement.

655
00:30:35,020 --> 00:30:38,260
If you think that other
person would be able to

656
00:30:39,220 --> 00:30:42,520
take business away from the
existing business, that's going

657
00:30:42,520 --> 00:30:47,380
to create a, a lowering of
the value of the business.

658
00:30:49,750 --> 00:30:51,760
And then just, you know, one of the things

659
00:30:51,760 --> 00:30:55,780
that I always like to talk
about is the different

660
00:30:55,780 --> 00:30:57,400
standards of value.

661
00:30:58,835 --> 00:31:00,550
I I, I know it sounds nerdy,

662
00:31:00,550 --> 00:31:05,050
but trust me, this is
really, really important

663
00:31:05,050 --> 00:31:07,240
and people need to be cognizant of it.

664
00:31:07,240 --> 00:31:11,410
So like giving you what those
definitions are general.

665
00:31:11,410 --> 00:31:15,070
So when we talk about a standard
of value, we mean the value

666
00:31:15,070 --> 00:31:19,960
to whom fair market value is
a hypothetical buyer seller.

667
00:31:19,960 --> 00:31:24,760
Fair value is value to generally,

668
00:31:24,760 --> 00:31:27,610
again, it could be for
financial reporting purposes

669
00:31:27,610 --> 00:31:31,090
or under a dissenting shareholder

670
00:31:31,090 --> 00:31:32,530
or shareholder oppression case.

671
00:31:32,530 --> 00:31:36,340
That just means it's the value
of the company unaffected

672
00:31:36,340 --> 00:31:37,690
by discounts

673
00:31:37,690 --> 00:31:40,990
and investment value generally talks about

674
00:31:40,990 --> 00:31:43,690
that value at the very highest level,

675
00:31:43,690 --> 00:31:48,640
which is the value to
a particular purchaser.

676
00:31:48,640 --> 00:31:51,790
Unlike fair market value,
which would be the value

677
00:31:51,790 --> 00:31:55,270
to a hypothetical purchaser, all three

678
00:31:55,270 --> 00:31:59,440
of those could produce a different value

679
00:32:00,730 --> 00:32:02,290
depending on how you apply it.

680
00:32:02,290 --> 00:32:04,000
So a lot of people like to say,

681
00:32:04,000 --> 00:32:06,760
why do people care why you're doing this?

682
00:32:06,760 --> 00:32:08,800
The value is the value is the value,

683
00:32:08,800 --> 00:32:10,840
it's always going to be the same.

684
00:32:10,840 --> 00:32:12,310
Absolutely not.

685
00:32:12,310 --> 00:32:15,520
IRS is always going to
use fair market value.

686
00:32:15,520 --> 00:32:18,760
That's the standard of value
for income tax purposes.

687
00:32:18,760 --> 00:32:21,550
Estate tax, gift tax purposes,

688
00:32:21,550 --> 00:32:25,870
fair value is generally a
legal standard under state law

689
00:32:25,870 --> 00:32:29,860
that sometimes is going to ignore any sort

690
00:32:29,860 --> 00:32:31,780
of discounts that would apply.

691
00:32:31,780 --> 00:32:33,280
Investment value is

692
00:32:33,280 --> 00:32:36,280
what we're using when
we're talking about exit

693
00:32:37,150 --> 00:32:38,380
planning for a business.

694
00:32:38,380 --> 00:32:41,390
It's trying to, the
highest value for somebody,

695
00:32:42,530 --> 00:32:46,310
which is usually a sale
to a strategic buyer,

696
00:32:48,350 --> 00:32:51,260
whether that be a competitor, a customer,

697
00:32:51,260 --> 00:32:53,060
somebody else out there.

698
00:32:53,060 --> 00:32:55,520
In certain instances it could
be a private equity firm

699
00:32:55,520 --> 00:32:57,140
that they're building a platform

700
00:32:57,140 --> 00:32:58,910
and it's their initial transaction

701
00:32:58,910 --> 00:33:00,230
that they want to get into it.

702
00:33:02,420 --> 00:33:04,490
So investment value

703
00:33:04,490 --> 00:33:09,200
and fair market value could
be quite a wide distance

704
00:33:09,200 --> 00:33:11,540
between it, but you need to be careful

705
00:33:11,540 --> 00:33:14,030
and be certain of what you're
otherwise trying to apply.

706
00:33:15,260 --> 00:33:18,470
- John Harry, let me ask you
a question along those lines.

707
00:33:18,470 --> 00:33:20,930
Have you seen a buy, sell,

708
00:33:20,930 --> 00:33:25,910
a poorly drafted buy sell
agreement be a hindrance

709
00:33:25,910 --> 00:33:27,830
to the sale of a business?

710
00:33:30,170 --> 00:33:31,670
- Yes.
- All right.

711
00:33:31,670 --> 00:33:34,490
Explain so that this
is an important concept

712
00:33:34,490 --> 00:33:35,660
for people to understand.

713
00:33:35,660 --> 00:33:40,660
So explain how like poor buy
sell agreements will hurt

714
00:33:41,150 --> 00:33:44,810
a business, the sale of
a business down the road.

715
00:33:44,810 --> 00:33:46,850
And this is an important
concept for the folks,

716
00:33:46,850 --> 00:33:49,100
particularly the professionals
who are here, who are,

717
00:33:49,100 --> 00:33:52,070
who are advising people to understand.

718
00:33:53,090 --> 00:33:55,850
- Yeah, because you can get
into a shareholders agreement

719
00:33:55,850 --> 00:33:58,670
where somebody has the
right of first refusal

720
00:33:58,670 --> 00:34:00,680
and maybe a right of first offer.

721
00:34:00,680 --> 00:34:03,260
So if that comes up, then one,

722
00:34:03,260 --> 00:34:06,410
one shareholder could actually
be tying up, you know,

723
00:34:06,410 --> 00:34:09,770
the company where the company
really can't move forward,

724
00:34:09,770 --> 00:34:12,890
you know, to from one one
of the shareholders to sell

725
00:34:12,890 --> 00:34:14,660
or to actually sell the company

726
00:34:14,660 --> 00:34:16,760
because they have their
own, you know, who, who gets

727
00:34:16,760 --> 00:34:18,050
to offer what.

728
00:34:18,050 --> 00:34:21,470
And you know, somebody could
actually manipulate those

729
00:34:21,470 --> 00:34:25,550
provisions to buyout a partner
at let's say the, the formula

730
00:34:25,550 --> 00:34:27,470
that John here was talking about,

731
00:34:27,470 --> 00:34:29,240
but they're planning
to flip out the company

732
00:34:29,240 --> 00:34:32,240
to another seller at a much higher level.

733
00:34:32,240 --> 00:34:35,810
So those, those can be
very, very difficult.

734
00:34:35,810 --> 00:34:37,640
The example I gave you earlier too,

735
00:34:37,640 --> 00:34:42,020
where two companies merged,
you know, one's a minority,

736
00:34:42,020 --> 00:34:44,450
one's a majority, you
know, they, they all have

737
00:34:44,450 --> 00:34:45,650
to do things in humanity,

738
00:34:45,650 --> 00:34:48,950
but can you imagine
trying to sell a company

739
00:34:48,950 --> 00:34:52,220
that if the a sales process
doesn't go through it

740
00:34:52,220 --> 00:34:54,350
to one satisfaction that they have

741
00:34:54,350 --> 00:34:56,960
to liquidate the company and separate it.

742
00:34:57,860 --> 00:35:00,200
I mean, somebody's going to ask
for that agreement to see it

743
00:35:00,200 --> 00:35:05,090
because in many cases you
want the outside person

744
00:35:05,090 --> 00:35:08,900
to buy your stock in these
companies for tax purposes

745
00:35:08,900 --> 00:35:12,590
to maximize capital gains tax
and not ordinary income tax.

746
00:35:12,590 --> 00:35:14,210
You don't be selling assets so

747
00:35:14,210 --> 00:35:15,800
that actually come into play if they see

748
00:35:15,800 --> 00:35:19,040
that they're going to know they
have a lot of negotiating room

749
00:35:19,040 --> 00:35:21,200
with respect to the
potential purchase price.

750
00:35:21,200 --> 00:35:23,540
So I think it's there all the
time, but John, why don't you,

751
00:35:24,470 --> 00:35:27,590
- Yeah, and I I I'll put
the flip on it that says,

752
00:35:27,590 --> 00:35:30,740
if you've got a stated redemption price

753
00:35:30,740 --> 00:35:34,340
or a formula at a time
that that is greater than

754
00:35:34,340 --> 00:35:37,530
what the market is, you've
got somebody that's going to,

755
00:35:37,530 --> 00:35:40,920
if they're looking at this
buying this company says, geez,

756
00:35:40,920 --> 00:35:42,930
I got to redeem, if somebody wants out,

757
00:35:42,930 --> 00:35:45,510
I got to pay them more
than what I'm willing

758
00:35:45,510 --> 00:35:46,620
to pay for the company.

759
00:35:46,620 --> 00:35:47,910
That becomes a problem.

760
00:35:47,910 --> 00:35:49,560
So somehow you need to address,

761
00:35:49,560 --> 00:35:51,240
or they're going to be looking at that.

762
00:35:51,240 --> 00:35:54,690
It should be part of the due
diligence on the acquisition is

763
00:35:54,690 --> 00:35:56,400
inquiring what kind

764
00:35:56,400 --> 00:35:59,220
of shareholder agreements do
you have out there currently

765
00:35:59,220 --> 00:36:00,660
and what are those provisions?

766
00:36:01,680 --> 00:36:03,990
Because yeah, it may cause a detriment

767
00:36:03,990 --> 00:36:06,390
or somebody that says, well hell no,

768
00:36:06,390 --> 00:36:09,120
if someone has the ability
to redeem their shares at

769
00:36:09,120 --> 00:36:10,470
that high of a price

770
00:36:11,400 --> 00:36:15,300
and get stuck with that
obligation, I don't want to assume

771
00:36:15,300 --> 00:36:17,970
that obligation or I don't
want that potential based on

772
00:36:17,970 --> 00:36:20,640
that given price. It's a problem.

773
00:36:20,640 --> 00:36:23,760
- Yeah, no, it's an Im
it's an important point.

774
00:36:23,760 --> 00:36:25,740
One more question along these lines,

775
00:36:25,740 --> 00:36:29,130
and I've seen this again
in professional firms.

776
00:36:29,130 --> 00:36:33,060
So you want to carve out, the
firm grows at a rapid pace,

777
00:36:33,060 --> 00:36:37,860
you want to carve out 10% of the
ownership of the firm to sell

778
00:36:37,860 --> 00:36:41,250
to a handful of up and
coming people, right?

779
00:36:41,250 --> 00:36:43,230
And you're going to
allocate that, you know,

780
00:36:43,230 --> 00:36:45,960
that portion based on whatever, you know,

781
00:36:45,960 --> 00:36:49,200
whatever you decide is
going to be that, you know,

782
00:36:49,200 --> 00:36:51,270
whatever formula you're going to use.

783
00:36:51,270 --> 00:36:54,540
So you know, you get 2% of that 10%

784
00:36:54,540 --> 00:36:57,300
and invests over this amount of time.

785
00:36:57,300 --> 00:36:58,800
How, how do, how should

786
00:36:58,800 --> 00:37:00,930
that be addressed in a buy sell agreement?

787
00:37:03,750 --> 00:37:07,350
- Gotcha. From a valuation
perspective, Dave,

788
00:37:07,350 --> 00:37:10,740
usually we would look
at fully diluted shares.

789
00:37:10,740 --> 00:37:14,790
So assuming that that 10% has
already been allocated just

790
00:37:14,790 --> 00:37:17,130
so somebody's not getting
a benefit or a detriment

791
00:37:17,130 --> 00:37:19,680
because of the issuance of that.

792
00:37:19,680 --> 00:37:22,800
So typically yes, we
would look at, you know,

793
00:37:24,240 --> 00:37:27,060
especially if there's even
any options outstanding

794
00:37:27,060 --> 00:37:30,420
with respect to the stock, again,

795
00:37:30,420 --> 00:37:33,960
looking at the fully
diluted shares on that, that

796
00:37:33,960 --> 00:37:37,650
they may not be in the money
at that point, you know,

797
00:37:38,610 --> 00:37:41,700
they may be in the money but
not a hundred percent invested.

798
00:37:41,700 --> 00:37:43,800
But we'd otherwise want to
take a look at that

799
00:37:43,800 --> 00:37:47,430
to consider all possible
transactions to make sure

800
00:37:47,430 --> 00:37:48,720
that somebody is again,

801
00:37:48,720 --> 00:37:50,460
is getting the true fair market value

802
00:37:50,460 --> 00:37:53,070
because on a, a sale of the company, yes,

803
00:37:53,070 --> 00:37:57,090
they're going to also be looking
at that, which sometimes

804
00:37:57,090 --> 00:38:01,710
these types of, you know,
allocations, whether it's be stock

805
00:38:01,710 --> 00:38:05,040
or options get triggered on a trans,

806
00:38:05,040 --> 00:38:07,290
on a triggering event as well.

807
00:38:07,290 --> 00:38:09,900
So that, that's otherwise
needs to be considered.

808
00:38:11,130 --> 00:38:12,150
- Okay, thank you.

809
00:38:13,785 --> 00:38:16,170
- John, you want to just flip
through the next couple slides?

810
00:38:16,170 --> 00:38:17,490
We have limited time.

811
00:38:17,490 --> 00:38:21,390
- Yeah, just a, a a
again, where we are today,

812
00:38:21,390 --> 00:38:23,700
when we're talking about selling

813
00:38:23,700 --> 00:38:25,230
or with perspective,

814
00:38:25,230 --> 00:38:28,350
valuing a particular
interest in a company,

815
00:38:28,350 --> 00:38:29,970
not a hundred percent of the company,

816
00:38:31,170 --> 00:38:33,090
if we're talking about a
hundred percent of the company,

817
00:38:33,090 --> 00:38:36,580
we're talking about the
traditional control value versus

818
00:38:36,580 --> 00:38:40,210
what we're now calling
strategic control value.

819
00:38:40,210 --> 00:38:43,420
So strategic control value is

820
00:38:43,420 --> 00:38:47,740
that investment value to
that one buyer that's willing

821
00:38:47,740 --> 00:38:49,690
to pay the highest dollar amount

822
00:38:49,690 --> 00:38:53,740
because there's a, there's
some sort of premium there.

823
00:38:53,740 --> 00:38:57,970
They have something that the
company wants as compared

824
00:38:57,970 --> 00:39:02,530
to a financial control
value, which is John, Dave,

825
00:39:02,530 --> 00:39:06,010
Nicola, anybody else
Perry looking at saying,

826
00:39:06,010 --> 00:39:09,880
this looks like a good investment,
it generates cash flow,

827
00:39:09,880 --> 00:39:12,220
I want to invest in that company.

828
00:39:12,220 --> 00:39:13,840
Once you get past that,

829
00:39:13,840 --> 00:39:16,750
now you're talking about
the interest in the company,

830
00:39:16,750 --> 00:39:19,870
which is a marketable minority.

831
00:39:19,870 --> 00:39:23,920
So that one's going to have a
discount for lack of control

832
00:39:25,270 --> 00:39:26,770
that says you can't control it,

833
00:39:26,770 --> 00:39:30,010
but it's still a freely
marketable interest

834
00:39:32,020 --> 00:39:33,880
public market type values.

835
00:39:33,880 --> 00:39:37,720
Well, most privately held
companies don't trade at that.

836
00:39:37,720 --> 00:39:39,880
You can't pick up the
phone, call your broker

837
00:39:39,880 --> 00:39:44,290
and say, Hey, sell my stock
and you know, x, y, Z tool

838
00:39:44,290 --> 00:39:46,690
and die company and get me my cash.

839
00:39:46,690 --> 00:39:50,860
So therefore hypothetical
buyers are going to take into

840
00:39:50,860 --> 00:39:54,970
consideration this
marketability discount that says

841
00:39:54,970 --> 00:39:57,430
when am I going to receive the value

842
00:39:57,430 --> 00:39:59,230
of whatever it is that I'm buying?

843
00:40:00,430 --> 00:40:01,900
And obviously there's a lot of things

844
00:40:01,900 --> 00:40:03,910
that impact it if you're considering

845
00:40:03,910 --> 00:40:07,540
or if you're interested in the
things that are considered.

846
00:40:07,540 --> 00:40:10,510
There's a case that we
use now called mandelbaum.

847
00:40:10,510 --> 00:40:12,610
It was an estate tax case

848
00:40:12,610 --> 00:40:17,560
and Judge RO identified what
we call the mandelbaum factors

849
00:40:17,560 --> 00:40:20,770
that says these are the things
that we look at to determine

850
00:40:20,770 --> 00:40:24,580
what, how marketable an interest is.

851
00:40:24,580 --> 00:40:25,900
So you know, what industry,

852
00:40:25,900 --> 00:40:28,030
your financial statement analysis,

853
00:40:29,410 --> 00:40:31,690
is there a redemption agreement in place?

854
00:40:31,690 --> 00:40:35,530
Do you make distributions
on a regular basis?

855
00:40:35,530 --> 00:40:40,360
You know, there's seven, nine factors that

856
00:40:40,360 --> 00:40:42,280
the tax court identified,

857
00:40:42,280 --> 00:40:45,100
but they all come into play
in determining what level

858
00:40:45,100 --> 00:40:47,410
of marketability discounts should apply.

859
00:40:49,930 --> 00:40:52,205
- That's one John.
- Yep, that's,

860
00:40:52,205 --> 00:40:53,830
that's basically the end of it.

861
00:40:53,830 --> 00:40:56,710
I know we had a couple
comments and questions.

862
00:40:56,710 --> 00:40:57,880
- Yeah, you know, John,

863
00:40:57,880 --> 00:41:01,390
before, let me, let me
do Susan's comment first

864
00:41:01,390 --> 00:41:02,980
and I'll ask Nicole to weigh in on

865
00:41:02,980 --> 00:41:04,545
this so you know I can help.

866
00:41:04,545 --> 00:41:05,865
Absolutely. You know, I can have to

867
00:41:05,865 --> 00:41:07,840
- Listen to a webinar when we're done on

868
00:41:07,840 --> 00:41:08,840
- This.

869
00:41:08,840 --> 00:41:10,750
So we, we we, we've covered the,

870
00:41:10,750 --> 00:41:15,700
we we touched on the FTC decision

871
00:41:16,660 --> 00:41:18,010
in Chicago

872
00:41:18,010 --> 00:41:19,480
and we didn't do it in New York,

873
00:41:19,480 --> 00:41:21,130
I think we did it in Chicago and Miami.

874
00:41:21,130 --> 00:41:23,620
So Nico, why don't you
read Susan's question

875
00:41:23,620 --> 00:41:24,790
and then touch on that

876
00:41:24,790 --> 00:41:27,190
and pitch it to the guys
if you need to afterwards.

877
00:41:27,190 --> 00:41:31,570
- I would love to sooth asked
do you see the new FTC non

878
00:41:31,570 --> 00:41:35,150
compete rules having any
impact on buyout agreements?

879
00:41:35,150 --> 00:41:36,530
So let me start with this.

880
00:41:36,530 --> 00:41:40,130
So the, the FTC rule banning
non-competes is actually

881
00:41:40,130 --> 00:41:41,630
not effective just yet.

882
00:41:41,630 --> 00:41:44,240
So it will be effective
we're targeting in September,

883
00:41:44,240 --> 00:41:48,200
unless it is the, the actual enforcement

884
00:41:48,200 --> 00:41:51,170
of the rule becomes stayed
by the current lawsuits

885
00:41:51,170 --> 00:41:52,370
that are going through the court system.

886
00:41:52,370 --> 00:41:53,660
They've asked for an injunction.

887
00:41:53,660 --> 00:41:54,980
If that injunction is granted,

888
00:41:54,980 --> 00:41:56,540
it could actually stay enforcement.

889
00:41:56,540 --> 00:41:58,550
So we are waiting to see
when it will be effective.

890
00:41:58,550 --> 00:42:00,950
So right now the rule's not in in place.

891
00:42:00,950 --> 00:42:03,860
And to answer that specific
question, if the rule

892
00:42:03,860 --> 00:42:06,950
as it is written becomes the law, then

893
00:42:06,950 --> 00:42:10,610
that rule actually has
a carve out for the sale

894
00:42:10,610 --> 00:42:12,110
of a business non-competes.

895
00:42:12,110 --> 00:42:15,740
So what that means is if you
are selling your ownership

896
00:42:15,740 --> 00:42:17,120
interest in a business

897
00:42:17,120 --> 00:42:21,200
or substantially all of the
businesses operating assets,

898
00:42:21,200 --> 00:42:24,470
then you are entitled to
have a non-compete in place

899
00:42:24,470 --> 00:42:27,050
with respect to that business owner.

900
00:42:27,050 --> 00:42:29,480
So the FTC has said we
are going to bless that

901
00:42:29,480 --> 00:42:30,740
and that's actually in line with

902
00:42:30,740 --> 00:42:33,740
where the case law has
fallen for decades, which is

903
00:42:33,740 --> 00:42:36,980
that you are entitled to
extra protection when you are

904
00:42:36,980 --> 00:42:38,660
dealing with a sale of a business.

905
00:42:38,660 --> 00:42:41,720
Why? Because it is the
goodwill of that business.

906
00:42:41,720 --> 00:42:43,550
It is everything that
has been put into it.

907
00:42:43,550 --> 00:42:45,260
So the law will better protect

908
00:42:45,260 --> 00:42:47,960
that when we're talking
about non-competes.

909
00:42:47,960 --> 00:42:51,560
So with that, I am interested
to hear John Harry,

910
00:42:51,560 --> 00:42:53,300
your thoughts on, you know, outside of

911
00:42:53,300 --> 00:42:56,150
that specific exception, you
know, where you see, you know,

912
00:42:56,150 --> 00:42:58,970
that new role having an
impact on these agreements?

913
00:42:59,870 --> 00:43:02,090
- Yeah, I'll just weigh in quickly on the,

914
00:43:02,090 --> 00:43:03,685
on the valuation side Nicole,

915
00:43:03,685 --> 00:43:08,540
which is we have always looked
at non-competes as a way of,

916
00:43:09,950 --> 00:43:13,580
or being indicative of personal goodwill

917
00:43:13,580 --> 00:43:15,770
rather than enterprise goodwill.

918
00:43:15,770 --> 00:43:19,040
If it's enterprise goodwill,
it belongs to the business

919
00:43:19,040 --> 00:43:21,620
and it transfers with the business.

920
00:43:21,620 --> 00:43:25,100
So if you're buying out somebody's
interest in the buy sell,

921
00:43:25,100 --> 00:43:26,870
what you're going to be
concerned with is whether

922
00:43:26,870 --> 00:43:30,230
or not there's any
personal goodwill that can,

923
00:43:30,230 --> 00:43:34,130
otherwise you need to,
I don't want to say block

924
00:43:34,130 --> 00:43:36,890
that makes it sound like
you're doing something illegal

925
00:43:36,890 --> 00:43:40,070
but protecting the business
interest that says yes,

926
00:43:40,070 --> 00:43:44,120
we understand you have
certain relationships,

927
00:43:44,120 --> 00:43:45,950
you have certain knowledge that you could

928
00:43:45,950 --> 00:43:48,620
otherwise take that's
going to harm the business.

929
00:43:48,620 --> 00:43:51,620
We want to make sure that
that's going to be protected.

930
00:43:51,620 --> 00:43:53,300
So along with that buy, sell

931
00:43:53,300 --> 00:43:56,270
or on a sale of a business, if you see

932
00:43:56,270 --> 00:44:00,230
that there's a non-compete
attached to it that's indicative

933
00:44:00,230 --> 00:44:02,870
that somebody believes
that there's some element

934
00:44:02,870 --> 00:44:07,870
of personal goodwill that
creates some income tax planning

935
00:44:08,300 --> 00:44:11,090
opportunities because again,
you could structure it

936
00:44:11,090 --> 00:44:13,070
as a sale of two bit

937
00:44:13,070 --> 00:44:16,400
or two interests, one sale
of your personal goodwill,

938
00:44:17,450 --> 00:44:21,830
which would be capital gain versus a sale

939
00:44:21,830 --> 00:44:26,150
of whatever at the business
of enterprise goodwill.

940
00:44:26,150 --> 00:44:28,820
If you're dealing with a C
corp now you got two levels

941
00:44:28,820 --> 00:44:29,990
of taxation there.

942
00:44:31,830 --> 00:44:33,930
Non-compete agreements
sometimes, you know,

943
00:44:33,930 --> 00:44:35,280
we'll have a tie up provision

944
00:44:35,280 --> 00:44:38,910
or a compensation agreement
where it's ordinary income,

945
00:44:38,910 --> 00:44:41,040
but that's all sorts of tax planning.

946
00:44:41,040 --> 00:44:42,240
But yes, if I see

947
00:44:42,240 --> 00:44:46,560
that there's a non-compete
in a transaction, then yes

948
00:44:46,560 --> 00:44:49,080
that tells me that
there's personal goodwill.

949
00:44:49,080 --> 00:44:52,890
People that don't, aren't worried
about the departing owners

950
00:44:52,890 --> 00:44:56,700
competing with them don't
usually enter into non-compete

951
00:44:56,700 --> 00:44:58,560
agreements 'cause
there's nothing that they

952
00:44:58,560 --> 00:45:00,300
otherwise have to pay to protect.

953
00:45:01,530 --> 00:45:05,010
- Yeah, N Nicole, I I would
just say that I think it kind of

954
00:45:05,010 --> 00:45:08,820
further drives home that if
the company has trade secrets

955
00:45:08,820 --> 00:45:12,240
or processes all their ip,
make sure that's protected.

956
00:45:12,240 --> 00:45:15,180
So if that person does
leave with a non-compete,

957
00:45:15,180 --> 00:45:16,920
they can't utilize that information.

958
00:45:16,920 --> 00:45:19,800
We've had a number of cases
where people just get up

959
00:45:19,800 --> 00:45:23,100
and open up a new company
next door, you know,

960
00:45:23,100 --> 00:45:24,300
they not only stole the data

961
00:45:24,300 --> 00:45:26,610
but they're stealing
the ip, the process and,

962
00:45:26,610 --> 00:45:28,170
and you know, trade secrets you have

963
00:45:28,170 --> 00:45:30,000
to document a certain way.

964
00:45:30,000 --> 00:45:33,390
So I would say that, you know,
it's going to force companies

965
00:45:33,390 --> 00:45:36,600
to really look at their IP
differently if this new role does

966
00:45:36,600 --> 00:45:39,150
come into place because that's usually

967
00:45:39,150 --> 00:45:40,200
what your company has, right?

968
00:45:40,200 --> 00:45:42,300
It's the IP about how you do things,

969
00:45:42,300 --> 00:45:44,220
how you process them and
how you approach them.

970
00:45:44,220 --> 00:45:47,250
So I think they have
much broader implications

971
00:45:47,250 --> 00:45:49,830
and I would just say to
all the professionals here,

972
00:45:49,830 --> 00:45:52,260
you should be talking to
your clients about how

973
00:45:52,260 --> 00:45:53,490
to protect all that now.

974
00:45:53,490 --> 00:45:55,350
So I mean who, who in the hell knows

975
00:45:55,350 --> 00:45:57,030
how this case is going to come out?

976
00:45:57,030 --> 00:45:59,760
- Yeah, the one thing
I would ask Nicole is,

977
00:45:59,760 --> 00:46:00,990
'cause I heard somebody mention it,

978
00:46:00,990 --> 00:46:02,160
that there is a difference,

979
00:46:02,160 --> 00:46:04,590
and I don't know if they're
treated differently under the

980
00:46:04,590 --> 00:46:07,530
FTC rule is a non-compete versus a

981
00:46:07,530 --> 00:46:10,680
non-solicitation provision. Oh boy, here

982
00:46:10,680 --> 00:46:11,680
- We go.

983
00:46:11,680 --> 00:46:12,660
Yes, yes. So I'll give
you the short answer.

984
00:46:12,660 --> 00:46:13,890
You, you're right John.

985
00:46:13,890 --> 00:46:17,550
They are non-solicitation
clauses are going

986
00:46:17,550 --> 00:46:18,660
to survive the rule.

987
00:46:18,660 --> 00:46:21,330
So they are not impacted
by that rule so long

988
00:46:21,330 --> 00:46:24,540
as they do not function as a non-compete.

989
00:46:24,540 --> 00:46:26,610
Meaning if you write them so broad

990
00:46:26,610 --> 00:46:28,830
that essentially you're
locking someone out from going

991
00:46:28,830 --> 00:46:32,160
to another company and still
performing the same job, then

992
00:46:32,160 --> 00:46:34,020
that's going to be
considered a unsolicited.

993
00:46:34,020 --> 00:46:35,910
So generally speaking, they survive,

994
00:46:35,910 --> 00:46:37,650
they are going to be treated different.

995
00:46:37,650 --> 00:46:39,205
- Gotcha. Thank you.
- And what,

996
00:46:39,205 --> 00:46:41,820
- What but the big car out,
I'm sorry Harry, go ahead.

997
00:46:41,820 --> 00:46:44,580
- Go. No, I was going to say Nicola,
what if you have them base

998
00:46:44,580 --> 00:46:46,950
that if you do do certain things

999
00:46:46,950 --> 00:46:49,500
that you just then owe
the company X percent of

1000
00:46:49,500 --> 00:46:52,650
that business rather than
saying it's not a non-compete.

1001
00:46:52,650 --> 00:46:55,890
So it's a, you know, somebody
leaves, they take part

1002
00:46:55,890 --> 00:46:58,320
of the business and then they
have to pay you X percent,

1003
00:46:58,320 --> 00:46:59,970
- There's a financial penalty Yes

1004
00:46:59,970 --> 00:47:01,710
- For them there's a
financial penalty on it,

1005
00:47:01,710 --> 00:47:03,060
but you're allowing them to compete.

1006
00:47:04,980 --> 00:47:08,580
- Yeah, I, I, I mean in the
way you are describing it,

1007
00:47:08,580 --> 00:47:10,380
I don't see that being a problem.

1008
00:47:10,380 --> 00:47:13,350
So it really comes down to
like exactly what, how is that,

1009
00:47:13,350 --> 00:47:16,650
how is that written and
what is it actually doing?

1010
00:47:16,650 --> 00:47:17,880
So not just, you know, it's,

1011
00:47:17,880 --> 00:47:19,290
it's the function over the form here.

1012
00:47:19,290 --> 00:47:21,360
It's like, you know, what is
it actually intended to do

1013
00:47:21,360 --> 00:47:23,100
and what will it end up doing?

1014
00:47:23,100 --> 00:47:25,710
- Right? But you can I get
to kind of the same place,

1015
00:47:25,710 --> 00:47:28,945
not exact by, by putting
in those staple provisions.

1016
00:47:30,340 --> 00:47:32,050
- I, you know, I want
to, I want to highlight

1017
00:47:32,050 --> 00:47:34,960
what you said at the beginning
there Nicola too in that

1018
00:47:34,960 --> 00:47:38,260
that this is one of the
things that whatever you think

1019
00:47:38,260 --> 00:47:39,670
of this ruling and

1020
00:47:39,670 --> 00:47:42,760
however it proceeds, this
is one of the areas you said

1021
00:47:42,760 --> 00:47:44,650
that is carved out

1022
00:47:44,650 --> 00:47:47,620
where it absolutely does apply when

1023
00:47:47,620 --> 00:47:49,480
you go to sell a business. Correct?

1024
00:47:49,480 --> 00:47:50,500
- Correct, correct.

1025
00:47:50,500 --> 00:47:52,930
It's the one area where
the FTC is clearly blessed

1026
00:47:52,930 --> 00:47:55,390
and said this is going to be an exception.

1027
00:47:55,390 --> 00:47:56,860
- You know, and I spell that out

1028
00:47:56,860 --> 00:48:01,600
because as I'm sure none of
you would be shocked to hear

1029
00:48:01,600 --> 00:48:05,020
somebody who does this sort of
thing for a living was like,

1030
00:48:05,020 --> 00:48:08,080
oh there was just a thing
the FTC said non-competes.

1031
00:48:08,080 --> 00:48:10,150
And I'm like, nope, talk to Nala.

1032
00:48:10,150 --> 00:48:13,480
Completely applicable,
completely applicable here.

1033
00:48:13,480 --> 00:48:16,570
So, you know, misinformation,

1034
00:48:16,570 --> 00:48:19,150
bad information is way,

1035
00:48:19,150 --> 00:48:21,400
way worse than no information at all.

1036
00:48:21,400 --> 00:48:23,680
So, you know, and we could go on

1037
00:48:23,680 --> 00:48:26,380
and on about where you're
getting your facts from,

1038
00:48:26,380 --> 00:48:29,620
but always, always check with the experts

1039
00:48:29,620 --> 00:48:32,020
before opining on something like this

1040
00:48:32,020 --> 00:48:35,020
because there's things, you know, this

1041
00:48:35,020 --> 00:48:37,690
and the Corporate transparency
act are two things in the

1042
00:48:37,690 --> 00:48:41,260
last six months that have
been blatantly bastardized

1043
00:48:41,260 --> 00:48:44,710
and misquoted over and over again.

1044
00:48:44,710 --> 00:48:47,560
And, and I'm as guilty as anybody else.

1045
00:48:47,560 --> 00:48:50,290
Bill Byers and I had a
conversation about this last week,

1046
00:48:50,290 --> 00:48:52,870
so make sure you check with the experts

1047
00:48:52,870 --> 00:48:55,600
before opining on any
of this other questions

1048
00:48:55,600 --> 00:48:57,940
before we let John and
Harry off of the hot seat.

1049
00:49:03,040 --> 00:49:04,815
Okay. Nicole it to you.

1050
00:49:04,815 --> 00:49:06,490
- Okay. I just want to say thank you.

1051
00:49:06,490 --> 00:49:08,440
That was very informative Harry and John.

1052
00:49:08,440 --> 00:49:11,710
Really appreciate it. If I
could just highlight two things

1053
00:49:11,710 --> 00:49:13,390
that in particular to just really

1054
00:49:13,390 --> 00:49:14,710
allow that to stick with you.

1055
00:49:14,710 --> 00:49:17,410
It's make sure that you're
really focused on the details.

1056
00:49:17,410 --> 00:49:18,820
I mean, how much have we heard here today

1057
00:49:18,820 --> 00:49:20,560
that the details really matter

1058
00:49:20,560 --> 00:49:22,390
what you are putting into that agreement.

1059
00:49:22,390 --> 00:49:23,770
The more you think through it

1060
00:49:23,770 --> 00:49:25,660
and the more detail you
spell out in the agreement,

1061
00:49:25,660 --> 00:49:27,070
the less you leave to chance

1062
00:49:27,070 --> 00:49:29,920
or determination by whatever
the default laws are in the

1063
00:49:29,920 --> 00:49:33,010
jurisdiction where that agreement
is going to be operative.

1064
00:49:33,010 --> 00:49:34,330
So if you don't spell something out

1065
00:49:34,330 --> 00:49:35,770
how the valuation is going to occur

1066
00:49:35,770 --> 00:49:37,600
or what happens in the
event that you know,

1067
00:49:37,600 --> 00:49:39,640
one partner is no longer
part of that business,

1068
00:49:39,640 --> 00:49:41,620
or if it's something happens
in changes in the business

1069
00:49:41,620 --> 00:49:44,710
that you didn't account for
it, you default to state law.

1070
00:49:44,710 --> 00:49:47,290
So that may not be what the
partners contemplated the time

1071
00:49:47,290 --> 00:49:48,550
that they entered into this business.

1072
00:49:48,550 --> 00:49:50,020
It could be completely different

1073
00:49:50,020 --> 00:49:51,010
and you're stuck with that if it's

1074
00:49:51,010 --> 00:49:52,900
not spelled out in the agreement.

1075
00:49:52,900 --> 00:49:54,970
And the other thing I would
highlight again is just making

1076
00:49:54,970 --> 00:49:57,400
sure that's an organic
document, that it is living

1077
00:49:57,400 --> 00:49:59,410
and breathing and as that business changes

1078
00:49:59,410 --> 00:50:01,780
and shapes into something
different over time,

1079
00:50:01,780 --> 00:50:03,820
it should be addressed
in the agreement itself.

1080
00:50:03,820 --> 00:50:05,380
So definitely make sure
you're, you're working with,

1081
00:50:05,380 --> 00:50:07,600
with your, you know,
not only your attorneys

1082
00:50:07,600 --> 00:50:09,640
but valuation experts,
your accountants, you know,

1083
00:50:09,640 --> 00:50:11,350
those were, that
agreement touches on a lot

1084
00:50:11,350 --> 00:50:13,930
of different areas as we
heard insurance as well.

1085
00:50:13,930 --> 00:50:16,180
So you really ask those
questions to the professionals

1086
00:50:16,180 --> 00:50:17,290
that have the answers to those

1087
00:50:17,290 --> 00:50:18,400
as you're putting them together

1088
00:50:18,400 --> 00:50:20,650
so you have a really tight
agreement that makes sure

1089
00:50:20,650 --> 00:50:22,180
that everything's taken care of in the end

1090
00:50:22,180 --> 00:50:23,230
and there's a plan in place.

1091
00:50:24,250 --> 00:50:26,380
Thank you both again,
really appreciate it.

1092
00:50:26,380 --> 00:50:28,030
And at this point I will
turn it over to Dave

1093
00:50:28,030 --> 00:50:29,470
'cause we've gotten an interview coming up

1094
00:50:29,470 --> 00:50:30,303
with Sherry Jamay.