Having the RIGHT Buy-Sell Agreement in place for your business helps you and your partner(s) set and manage expectations when it comes to your partnership. Because many relationships and businesses fail due to a lack of communication, a Buy-Sell Agreement helps enable the right communication to happen.
Think about the games you used to play as a child. Ever experience someone trying to change the rules (or redefine how they’re being interpreted) in the middle of the game? How’d that work out? Not so great generally. In business, however, you can’t simply take your ball and go home.
A Buy-Sell Agreement clearly defines the “rules of the game,” so there are no questions about what was intended. And reviewing it regularly allows you to best assess:
- Are the rules still applicable?
- Or, has the game changed enough where you need to revisit the rules?
Why Do You Need To Review Your Buy-Sell Agreement Regularly?
With time comes change, it’s inevitable, whether it’s in life or business – owners change, business values increase (or decrease), and sometimes businesses change, be it direction, industry, products, etc.
And with change, the need to review an existing buy-sell agreement becomes all the more important.
Below are five reasons a business’s buy-sell agreement should be reviewed.
#1 The Business’ Value Has Changed
If you own a home, you know how fun it can be to pull your address up on Zillow and see the estimated value just for fun. It’s exciting when you see the estimated value has increased but not so fun when you see that value has decreased. But, either way, you have an understanding of an estimated value at least.
Overtime, it’s likely that the value of your business has changed, especially if your business is growing (like we hope it is). If your business is growing, that dollar amount has changed. Your initial approach for your business valuation is either a formula-based approach or a fixed amount to calculate its worth.
For the formula-based approach, you need to ensure that the formula is accurate to what value of your business is.
And for a fixed approach, which is not as ideal for a buy-sell agreement, that fixed dollar amount has most certainly changed.
It’s essential that your valuation accurately reflects what your business is worth. And if you don’t know how your company is valued…you must review it for anything that may be inaccurate or unfair.
#2 Your Partnership(s) Have Shifted
Since your Buy-Sell agreement is legally binding, there are specific procedures dictated for buying out a partner’s share of the business in the event of certain triggering events, such as a partner leaving the business.
Changes or shifts in the ownership structure require you to revisit your Buy-Sell agreement and update that legally binding document. Clearly defined ownership stakes prevent any ambiguity or disputes among the remaining partners, allowing for minimal disruptions to the business.
After all, protecting the continuity of your business is of utmost importance upon the departure of a partner.
#3 The Buy-Sell Doesn’t Address The Correct Triggering Events
Many owners only think about buy-sell agreement in relation to their death. While a great place to start, it is only ONE of the major triggers of a buy-sell agreement. As you review your own agreement, a good start is to ask if your agreement factors in the following:
- Death
- Disability (and how it is defined)
- Divorce
- Disagreement
- Deadlock
- Distress (financial problems, personal issues, or other factors)
- Departure (retirement, insolvency, voluntary or involuntary termination), and
- Dissolution (the firm itself dissolves)
For the record, we could come up with a few more starting with the letter “D,” but we think you get the point.
#4 The Buy-Sell Agreement Hasn’t Been Funded
Simply having a Buy-Sell Agreement in place isn’t enough. How is your agreement funded? The buy-sell agreement is the set of instructions that comes along with the game. It is NOT the funding mechanism. The set of instructions, if you will, simply shifts a party from stakeholder to non-stakeholder. The agreement needs to be funded, and moreover, the funding must align with the terms of the buy-sell.
Funding a buy-sell agreement involves ensuring that there are financial resources available to execute the terms of the agreement. There are several ways to fund a buy-sell agreement, and the method chosen often depends on the specific circumstances of the business and its owners.
#5 You Don’t Have A Buy-Sell In Place
According to a 2018 MassMutual Business Owner Perspectives Study, only 46% of business owners had a buy-sell agreement in place. That’s less than HALF. And frankly if you’re part of that number, especially after reading reason one through four, getting yourself out of that 46% is crucial to the future of your biggest asset.
Establishing a buy-sell agreement for the first time will help you to be proactive and make clear, thoughtful decisions for the benefit of those after your exit – your family and business partners.
There are four options when it comes to protecting your business with a buy-sell structure:
- Cross Purchase
- Entity Purchase
- Special Purpose LLC
- Unilateral
Addressing what the right buy-sell structure is for your business will make everything that follows more seamless for all parties involved.
Is Your Buy-Sell Agreement Adequately Protecting Your Business?
Even though A LOT can happen since you established your agreement, it’s possible that your Buy-Sell Agreement is great as is. But, it’s better to know than to wonder.
At the very minimum, an informal valuation of your company should take place to see whether or not any gaps exists between:
- What the Buy-Sell Agreement states
- What the value of the business is and if there is a disparity
- What protection is in place vs. what your company is worth
If you find yourself wondering where your business stands today, complimentary services are available through Guardian for both your valuation and Buy-Sell Agreement.
Remember, the more due diligence you can do up front – the more time and cost savings there is for you on the backend. Let an experienced professional at Consolidated Planning help you maximize your resources and protect your business.
2023-165305 Exp. 11/2025
Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
