Business Check Up: Why You Need to Revisit Your Buy Sell Agreement Periodically

When I was growing up, it always felt like things would break down in the fall. Once school got started and the summer heat in Texas took a break, the car would break down or the AC would go out. While I thought it was superstitious (and not fun at the time), the fact was that my parents planned well and chose the fall season to update things in the house systematically so that it stayed maintained. You see, neglecting properties is not seen as a wise decision.

The same can be said for business owners and their succession plan. While many business owners will establish a buy sell arrangement when the business is initially established, that’s where most of these agreements end; filed away and never to be seen or updated again. Small business owners devote 110% of their time and energy to the day-to-day operations of their business. They may not have the time to think about reviewing the buy sell agreement let alone update it. But not setting aside time to periodically review the buy sell agreement may create challenges, especially when the business owners’ original intention was to:

• Revisit and adjust the valuation of the business as appropriate;
• Avoid an inadvertent future outcome of co-owning the business with a departing shareholder’s spouse or children;
• Ensure business interests are purchased by the business or the remaining shareholders following a triggering event specified in the agreement;
• Guide future management of and decisions regarding the business;
• Keep pace with changing dynamics of the business, the competition, or the industry at large; and/or
• Identify and address business valuation issues that may impact the owners’ exposure to federal and/or state estate taxes, particularly when the agreement is funded with life insurance.

There are many ways a business can choose to fund their buy sell arrangement; creating a sinking fund, doing an installment sale using cash flow from the business, or even taking on debt (via a loan.) However, using life insurance to fund the buy sell arrangement is generally seen as one of the most cost-effective strategies.

In addition to the benefits noted above, with proper planning, a buy sell agreement can provide surviving family members with financial liquidity following the death of an owner and ensure that an owner’s wishes regarding the business and their business interests are carried out in the event of an agreed-upon triggering event. This significantly reduces the possibility of disharmony or lawsuits.

Just like a homeowner who neglects to maintain their property, failing to keep a buy sell agreement updated can potentially leave the business exposed when a triggering event happens. Business owners who routinely review their buy sell agreement afford themselves the opportunity to modify the agreement to account for the evolving needs, goals, and objectives of both themselves and the business.

By making sure business owners periodically review and update their buy sell agreement (with both attorney and CPA), you will reinforce your role as a valuable memberon their team. You might also uncover additional sales opportunities with the business owner and even receive a referral to other business owners who would benefit from working with you.

– Jim Moseley, Advanced Sales Specialist