What are the benefits of reviewing a buy-sell agreement regularly?

Regular review of the buy-sell agreement ensures that the document remains relevant and effective in a changing business environment. Firstly, it ensures compliance with changes in legislation and tax policy, minimising legal risks. Secondly, the review allows for changes in the ownership and management structure of the company, which is especially important when new shareholders appear or shares change. The third aspect is the revaluation of the assets, which ensures that the terms of the transaction reflect the real market situation. In addition, regular analysis helps to identify potential conflicts in advance and eliminates uncertainties, increasing financial stability and confidence among partners.

One of the biggest issues we see with buy-sells is when partners don't have a process in place for updating valuations over time. Perhaps the life insurance policies were sufficient 5 years ago, but hopefully business (and numbers) have improved since then. A well-drafted buy sell (or partnership agreement) will have a provision that governs the frequency, method, and process for recurring valuations. It doesn't need to be yearly, but there should be a way to ensure that the most recent valuation (especially when there's a triggering event) is both (1) somewhat recent and (2) accurate. Paying out on a stale valuation is a sure way to throw a wrench into an already difficult situation.

Supply and demand can have a significant impact on the value of most businesses. Business owners can avoid surprises with a periodic review of their valuation formulae to confirm they are still in congruence with current market conditions.

Regular reviews of your buy-sell agreement can reveal shifts in market trends and competitor strategies that could impact your business valuation. Look beyond standard metrics; consider intangible assets like brand equity and intellectual property. By incorporating advanced valuation techniques such as scenario analysis and real options valuation, you ensure a comprehensive, forward-looking assessment that can safeguard against market volatility and ensure equitable outcomes for all parties involved.

A business' value changes year to year, maybe even month to month or day to day. Ensuring that the Buy/Sell is regularly reviewed is essential to its success. If a decade goes by and your business has doubled in size but you never amended the buy/sell AND increased the funding mechanism you are in trouble of losing your business if the agreement is triggered.

With the upcoming reduction of the estate tax exemption, millions of additional business owners will suddenly be impacted by confiscatory tax. They must act now! If they miss the deadline, they will incur a voluntary tax of $400,000 per $1M of wealth!

As personal circumstances change, it’s crucial to ensure that the buy-sell agreement aligns with the owner’s estate plan. Regular reviews help maintain consistency between the two, minimizing potential conflicts and ensuring that the owner’s wishes are respected.

Ensuring that the buy/sell and estate plan align is extremely important! To ensure that the buy out of the partners equity is distributed based on the wishes of the deceased partner the plan must be reviewed. Life happens, beneficiaries change. Not regularly reviewing both the buy/sell and estate plan can create headaches down the road.

Most buy-sell agreements will benefit from a review every few years. What changes to ownership have there been? Is the funding arrangement still adequate?

It all comes down to regular reviews. Businesses are dynamic. What is true of the business today is most likely going to be different than a year from now.

The needs of a business and its owners can shift over time due to factors such as growth, changes in ownership structure, or new strategic goals. Reviewing the agreement regularly allows it to be adjusted to meet these changing needs, ensuring it remains relevant and effective.

The only constant is change, and change comes at us at an ever accelerating pace. A regular compliance review is helpful in confirming that the provisions of the agreement are still enforceable following a triggering event.

Proactively revisiting your buy-sell agreement minimizes friction among stakeholders by preemptively addressing evolving priorities and expectations. Periodic updates ensure alignment with current business goals, maintaining fairness and clarity. Incorporate peer benchmarking and stakeholder surveys to identify potential discord early, creating a robust framework for amicable resolutions.

Regularly reviewing a buy-sell agreement builds trust and confidence among stakeholders, showcasing commitment to long-term success. Enhanced communication through the agreement can lead to increased support, cooperation, and investment in the business. Example: A family-owned business regularly updating its buy-sell agreement reassures family members and outside investors of the company's stability. Clear vision and contingency plans outlined in the agreement instill confidence in the business's future resilience. Effective communication of the buy-sell agreement can prevent misunderstandings and disputes, fostering a harmonious business environment.

Believe it or not, but a properly funded buy/sell can actually enhance the value of the business when you are preparing to sell. It ensures that the surviving partner will not have to raise funds (potentially selling a portion of the business) in a hurry and at a discount. This is a risk that can be easily removed by proper planning which will essentially add value to the business.

Sadly, something often overlooked in buy-sell agreements is the high risk of a principal's disability, resulting in a funding gap when these events do occur. Considering the greater likelihood of experiencing a disability as compared to a death during one's working career, integrating both disability buy-out and key-person disability insurance programs into your financial plan is crucial. This approach secures prompt funding for the buy-out, while also compensating for financial losses associated with a principal's inability to make ongoing contributions to the business. Selecting an advisor proficient in designing both buy-sell and key-person disability insurance plans is a crucial component to effectively safeguarding your business…

The funding mechanism, what ever that be, should be liquid and safe. We never can predict when a partner will die so investing the market, using real estate, or products that lock money in for specific time periods should be avoided. The simplest and most cost effective way to fund is a life insurance policy. Depending on cash flow and profitability of the business a whole life policy can also be used to compensate a partner if they want to retire. Multiple uses!