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THE BUSINESS OF BUILDING Are You Ready for Your Business Succession and Exit? WE Real Estate, Business, Construction and Environmental Law Alert: By Peter Feuerbach, Esq. ARE OFTEN ASKED to help a business through a transition involving a sale, acquisition or succession within a family, with co-owners or with key employees. Given that these transitions may evolve over a long period of time, it is important for owners to plan an “exit strategy” to maximize their business value and achieve their exit goals. Although the terms of each deal are unique, the following issues often require negotiation among the parties: Buy/sell agreement (also called business continuity agreement): These provisions are important for business continuation because they specify: the conditions for transferring the partners’ interests in a business and have the goal of identifying who can (and who cannot) acquire the interests; the triggering events for the transfer (e.g., resignation, death, disability, bankruptcy, divorce, business disputes, etc.); and the method of valuing the inter- ests at the time of transfer. In essence, the remaining owner(s) agree to purchase the interest of the departing owner pursuant to the terms of the agreement. Without such an agreement, a business could falter if there are problems with the withdrawing owner, an ex-spouse or heirs. An important component of a buy/ sell agreement is the funding mechanism to buy out the interest and pay any estate taxes to accomplish the transfer, such as “key person” life and disability insurance. Earn out provision: The acquirer may want to pay part of the acquisition price over time through an earn-out provision. Thus, some amount is paid when the deal closes, and the balance is contingent on the company’s future performance. Certain target goals are set for several years in the future for such metrics as gross revenue, earnings, net income, new customers, etc. Of course, care must be taken to ensure that the targets are not made diffi cult to achieve or manipulated (e.g., reducing the marketing budget, increasing or infl ating overhead expenses, making unexpected capital expenditures, poorly operating the business, customers preferring to deal with the prior owner, change to the company’s operations, etc.) The seller can monitor the company’s future business if it negotiates a new role as an employee or consultant, with limita- tions on the buyer’s ability to replace the seller. Monitoring may also be achieved by retaining rights to audit the company’s books. A dispute resolution provision can be helpful, so the parties know in advance how disputes will be settled. Noncompete provision: A covenant agreeing not to compete may prevent the seller from competing with or divert- ing business away from the company. A noncompete provision may not trouble a retiring owner, but it may concern a younger seller who is prepared for the next business venture. Noncompete agreements are enforceable in Massachusetts, espe- cially those contained in an agreement to purchase a business. (However, new legisla- tion has been discussed in Massachusetts in recent years to regulate noncompete agreements in the employment context.) 32 | GREATER BOSTON Builder+Architect BOSTON.BUILDERARCHITECT.COM Although noncompete agreements are judged on a case-by-case basis, enforceabil- ity often hinges on whether the agreement is: supported by “consideration” at the time it was signed (such consideration is typi- cally found in the purchase of a business); tailored to protect a legitimate business interest, such as prohibiting the individual from soliciting the company’s customers, protecting trade secrets and protecting good will; and reasonably limited in terms of its duration, geography and scope. Business succession raises additional issues concerning future management, business valuation, tax liabilities, legal structures and the like. A proactive owner should consider these issues with trusted advisors (e.g., accountant, fi nancial planner, insurance agent, attorney, etc.) to plan a rewarding exit. Attorney Peter Feuerbach’s practice concen- trates in real estate, business, construction and environmental law. He obtained his LEED Accredited Professional credential in March 2009. Feuerbach may be reached at (617) 330-7136 or via e-mail at pfeuerbach@ rubinrudman.com. This article is intended to provide general information about an area of law. It is not legal advice. You should consult with legal counsel for advice specific to your circumstances. This memorandum is not an invitation to enter into and does not create an attorney-client relationship. Please do not send confi dential information without first receiving permission to do so from Feuerbach or one of his attorneys. n