A few factors have come together recently to make the timing perfect for financial advisors to read Christopher Mercer’s Buy-Sell Agreements for Closely Held and Family Business Owners: How To Know Your Agreement Will Work Without Triggering It. This is a book that fully explores the intricacies of buy/sell agreements and the potential dangers buried beneath the legalese in most of the agreements currently in place.

First, the advisor population is aging. Consequently, every advisor operating under a partnership or ensemble model is moving inevitably closer to having whatever buy/sell arrangement they have in place triggered by the retirement, death or disability of one of their associates.

Second, the economic meltdown of 2008 had motivated many advisors to come together in partnerships to create a larger practice better able to withstand the vagaries of the markets and the varied needs of clients. Every one of them should have an agreement in place to deal with the contingency of the partnership changing.

Finally, there is the steady stream of requests I receive for sample partnership agreements, including buy/sell triggers, valuation methodologies, non-competition clauses, funding mechanisms and so on. (Thank you, Christopher Mercer, for capturing all this information in one place.)

Setting aside the technical details, which are also well addressed in this book, here are some of the compelling observations the author, a highly regarded business-valuation expert, makes. They should galvanize anyone with an existing buy/sell agreement, or anyone contemplating one, into action:

> Most existing agreements have not been updated with sufficient regularity to reflect the realities of the business today. People have come and gone from the firm, valuations have changed, interests and energy have waxed and waned, government regulations and tax rules have made original decisions less preferable today.

> Most valuations pit partners against each other in a high-stakes betting game; if the valuation is inappropriately low (as many are because they have not been updated), you’re betting on the other guy leaving the partnership first so you can get a bargain. If it is inappropriately high, you’re betting on yourself being the first one out so you or your family get maximum value.

> Despite the intellectual acceptance that a buy/sell agreement is important, on an emotional level, many partners don’t want to think that anything will actually happen to them that would trigger the agreement’s provisions. After all, the partners had entered into the partnership based on mutual trust, respect and long-term visions. However, as Mercer notes, “bad things happen to good people, too.”

> The agreement must contemplate more than simply what happens to someone’s share of the business in the event of death or disability. A few of the other “D” words to be considered: dishonesty (loss of trust), disillusionment (lack of optimism), disaffection (loss of interest), dissatisfaction (loss of fun), divorce (loss of assets), disqualification (loss of licence), deadlock (lack of agreement) and discredit (low valuation of a partner’s contribution).

Mercer dramatizes the importance of having an up-to-date agreement, asserting that it should always reflect what you’d like it to say if you had to sell your share of the business today. In his view, the ideal time to sell your business is when the following factors are aligned:

> it is doing better than it has ever done;

> the market for businesses like yours is rising;

> the industry is hot;

> financing is cheap;

> there are irrational buyers;

> you are ready to sell.

This sounds to me very much like the environment in which many financial advisors find themselves today. Add to this the unpredictability of death or disability, and the case in favour of preparing for a sale now is unquestionable.

This book is written primarily for firms that are larger than most financial advisory practices, but that does not diminish its value. The concepts are valid at any size. Nor is the book’s advice applicable only to existing partnerships. Any advisor contemplating succession through the purchase of his or her book of business by a current or future associate, family member or outside bidder would do well to do so under the terms of a well-crafted buy/sell agreement.

Someday, every advisor will be a buyer or a seller; and between now and then, things will happen. The time to complete the changeover can become extended to the point at which the risk of an unanticipated and undesirable situation can jeopardize the intended outcome. This book is a valuable guide to minimizing that threat. IE