How to be a

$uccessful Construction Financial Manager

Knowledge. Resource. Opportunity.

SHAREHOLDER AGREEMENTS

A KEY ASPECT OF OWNERSHIP SUSTAINABILITY IN CLOSELY HELD

CONSTRUCTION COMPANIES

Jon Zeiler, CPA, Partner

Crowe Horwath LLP

Construction Services Leader

Direct: 630.575.4237

jon.zeiler@crowehorwath.com

TODAY’S PRESENTER

Steve Andrews, CPA, Partner

Crowe Horwath LLP

Construction Services Leader - Tax

Direct: 630.574.1647

steve.andrews@crowehorwath.com

I. Overview

II. Advantages and Risks

III. Types of Buy-Sell Agreements

IV. Typical Provisions

V. Valuation, Payment Terms and Other Provisions

VI. Q&A Session

AGENDA

Set Rules Governing Stock Ownership

Plan for Contingencies – Death and Disability

Plan for Voluntary or Involuntary Withdrawals

Set Economics for Early Withdrawal

OVERVIEW – PURPOSE OF AGREEMENT

Treat People Fairly

Respect Prior Commitments/Stock Deals

Protect the Company (Golden Goose Theory)

Balance Risk Between Exiting Owner(s) and Remaining Owners

BASICS OF THOUGHT PROCESS/PHILOSOPHY

Risks with No Buy-Sell Agreement Unwelcome business partner

“Cousins in Chaos”

Surviving spouse unwilling or ill-prepared to make decisions

Attorneys are smiling

Undesired economic outcome

Advantages of Buy-Sell Agreements Guarantees a buyer for an asset which probably would not pay dividends

to one’s heirs

Spells out the terms of payment and can usually be fully funded with life and disability insurance, if desired

Provides a smooth transition of complete control and ownership to those who are going to keep the business going

Can establish a value for Federal Estate Tax purposes, which is binding on the IRS

RISKS WITH NO BUY-SELL AGREEMENT/ADVANTAGES OF BUY-SELL

AGREEMENTS

1. Entity Plan: The partnership (or corporation) agrees to buy the interest of the deceased /former partner (or shareholder)

TWO TYPES OF BUY-SELL AGREEMENTS

Partnership or Corporation

Partner/Shareholder

#2

Partner/Shareholder

#1

Partner/Shareholder

#3

buy-sell buy-sell

buy-sell

2. Cross Purchase Plan: The partners (or shareholders) agree to buy the interest of the deceased/former partner (or shareholder)

TWO TYPES OF BUY-SELL AGREEMENTS

Partner/

Shareholder #1

Partner/

Shareholder #3

buy-sell

Restrictions on Transfer – General First option to purchase stock to Company

Section option to purchase stock to shareholders (pro rata)

If one shareholder declines, offer his share to others pro rata

Time periods

Tax implications – cost of basis shares

BUY-SELL AGREEMENTS

Specific Situations Death

Disability

Retirement

Gifting among family – Allowable? Requirements?

Voluntary withdrawal

Involuntary withdrawal

BUY-SELL AGREEMENTS

Death Obligation of estate to sell

Insurance funding must follow obligation – cross purchase vs. Company redemption

Insurance proceeds > Purchase price Paid upon receipt

Company keeps excess

Insurance proceeds < Purchase price Promissory Note for balance

Life insurance on owners

Nearly always at full value

BUY-SELL AGREEMENTS

Disability Defining disability – Temporary disability – first 12 months

Evaluation of Permanent Disability Ability to perform normal job duties

Opinion of physician

If permanently disabled, Company has the option obligation to purchase stock

Full/value purchase price

BUY-SELL AGREEMENTS

Retirement Defining “retirement”

Age plus years of service > 85

“Put” stock at 55 (Company must buy)

“Call” stock at 60 (Company right to buy)

Generally full value

BUY-SELL AGREEMENTS

“Cause” defined – ethics, felony, ‘material’ failure to perform duties, comply with Board, personal conduct, injurious to Company

Offer but no obligation to buy Generally full price

Offering owner may go to third party with any portion not purchased

Company has the right to match third party offer

Payment with Note by Company, all cash if bought by other owner

TERMINATION WITHOUT CAUSE AND INVOLUNTARY TRANSFER

Leaving owner generally much offer to sell to Company

Generally some reduction in current value

Possible restriction on payment, e.g., note payments delayed until a certain age

Penalty on price is thought to be for doing something within ‘Cause’ definition or leaving the Company early (i.e., before Retirement)

VOLUNTARY TERMINATION AND TERMINATION WITH CAUSE

Net book value (owners’ equity)

Formula based on earning (EBITDA and book value)

Excludes life insurance proceeds

Increase securities or real estate to FMV

Include significant contingencies if >5% of equity

Right of set-off against price for certain adjustments

Certificate of agreed upon value – (with expiration)

VALUATION CONSIDERATIONS

Payment Terms 20% down

Promissory Note for balance

Promissory Note Terms Payment period – sliding scale based on size of note

Fixed interest rate – Wall Street Journal prime rate

Security for Note – Shares/Dividends paid on shares

Aggregate limitation on payments to exiting owners on notes – e.g., 25% of cash flow

Right of repayment

BUY-SELL AGREEMENTS

Non-compete, non-solicitation, confidentiality

Salary continuation

Benefits

Release of guarantees and indemnification

ANCILLARY PROVISIONS

Drag Along and Tag Along Rights

Possible retroactive adjustment of price for owners who exited earlier

SALE OF COMPANY

Jon Zeiler, CPA, Partner

Crowe Horwath LLP

Construction Services Leader

Direct: 630.575.4237

jon.zeiler@crowehorwath.com

QUESTIONS

Steve Andrews, CPA, Partner

Crowe Horwath LLP

Construction Services Leader - Tax

Direct: 630.574.1647

steve.andrews@crowehorwath.com

THANK YOU!!!!