Understanding the Roles of the Professionals - Why Use a Consultant?

When business owners attempt to negotiate owner agreements with buy-sell provisions, they are frequently confused and stymied. All the professionals involved with the company, insurance agents, accountants, and lawyers, are willing to participate. All expect to get paid for their efforts, and the perspectives and priorities differ. Any resulting owner agreement seems prohibitively expensive to implement. As a business owner, you reasonably may ask: how do I navigate the course to implement the owner agreement, not pay too much in professional fees, and have an agreement that will be honored?

The answer lies with what consensus there is among the business owners about the issues that must be resolved before the agreement can be executed.

If the company has a written strategic plan in place, a number of things probably have occurred. As the planning was being done, the accounting information necessary to the planning determinations was received by all the owners from the accountant for the business. In agreeing upon the planning, all the owners reviewed information regarding the company’s status and governance. As a part of this review, a discussion was had between the owners which resulted in a consensus documented in writing as a strategic plan. With a written strategic plan, the owners can confer with the lawyer drafting the agreement and based on the consensus documented in the strategic plan successfully answer the questions the lawyer has to ask to complete the drafting of the agreement. Once the agreement is drafted, each owner, with separate legal counsel, can review the written agreement and determine its adequacy for that owner’s interest including funding and insurance issues. If this is the case for your business, you are at the most efficient level of operation for quality decision-making in your business and for experiencing efficient professional fees.

But wait, you might say one or more of the following is the case. My business does not have a strategic plan much less a written strategic plan. Complete accounting information is not shared among the owners – only the majority owner has access to all accounting records and reports. There are no meetings among the owners and no discussions rake place about the goals and values of the owners. While there is a buy-sell agreement drafted by the lawyer representing the business, the owners were just told to sign it without the review of their own legal counsel. All these, and quite a few more common business situations, are indications that the course to executing a quality owner agreement that will be honored is one full of obstacles, not the least of which will be the probability of paying too much in professional fees.

For a business to implement a credible and enforceable owner agreement at a reasonable cost, there must be a fully informed consensus among the owners of the typical issues resolved by an owner agreement. Those issues are as follows:

What is the goal of business ownership for each owner?

Should there be ownership transfer restrictions?

What events should cause a buyout of an owner’s interest?

What is the value of the business in terms of each owner’s interest?

What funding should be in place for the purpose of a required buyout of an owner’s interest?

If an owner who is also an employee withdraws from the business, should a non-competition clause be a part of the buy-out?

Should there be restrictions on the remaining owners withdrawing funds from the business until the buyout of an owner is completed?

Should the owners agree on certain aspects of the governance of the business, such as the legal entity to be used, what advisory group to use, or how to select the chief executive officer?

Should there be in place a private conflict resolution procedure?

If this consensus does not exist, then your company is like most. If you try to go from no planning to executed owner agreement, no matter the professionals involved, you will pay too much and most likely fail to get a credible agreement that will be honored.

While professionals (insurance broker, accountant, and lawyer) are probably capable of having the interviews and meetings with the owners to establish the consensus necessary for the planning that will make the agreeable possible, they will want to charge a high professional fee for that activity and they cannot do all that needs to be done because of conflicts of interest. The professionals are in the business of selling insurance or practicing accounting or law, not the business of creating and documenting business planning decisions.

Moreover, there are ethical issues. The professionals must identify a client and maintain confidences. For any professional representing a business, it is ethically difficult to claim an adequate representation of one of the owners of that business and also represent the business – especially when the representation involves an agreement among the business and its owners.

As a consultant, I can become involved with a business on the basis of keeping no confidences. My job is to build consensus and I will tell each party that anything I am told will be disclosed to all parties. A professional with a prior representation of any other party to the owner agreement will have a very difficult time taking that position. The identified purpose of the consultant can be to put in place a strategic plan which by its terms requires consensus. The consultant’s role is not harmed by the pledge of keeping no confidences – unlike the professionals who must represent the best interests of one of the parties, the consultant will have no conflict of interest.

This does not mean the professionals are excluded. There will be an instruction to all parties that any party wishing to receive professional advice should proceed to do so without the involvement of the consultant. The consultant will not engage in the legal activity of drafting or advising about the unique aspects of the agreement to each party. The consultant will not control accounting or financial information concerning the company activities. The consultant will not arrange for insurance funding of the agreement.

The strategic plan enables the drafting of an owner agreement. The consultant’s role of documenting the consensus of the owners leads to a more efficient process of implementing a quality owner agreement. The overall fees for the professionals will be lower and the agreement will be an agreement that is more likely to be honored and enforced.