An outdated buy-sell agreement may be worse than having no agreement at all

The buy-sell agreement may be the single most important document the owners of a closely held business will ever sign. It controls the transfer of ownership when certain events occur, such as the death or disability of a shareholder, retirement, an involuntary termination or a dispute among the owners.

Most co-owned companies have buy-sell agreements in place. Usually, they were created long before the companies became successful. Now they sit in a desk drawer and gather dust. Until they’re triggered by transfer event. That’s when serious problems may arise.

If the agreements are out-of-date, it’s likely that they won’t reflect either the current circumstances of the owners or their current wishes regarding business continuity. Also, it’s likely that the value of the business has significantly changed, affecting cost, funding and the ability to smoothly execute a triggered transfer.

We believe it’s a best practice for owners and their advisors to review these agreements annually. Here are a few common issues that should be considered in your review.

Who is included in the agreement? Has there been a change in ownership or the proportions of ownership?

How is the future buyout amount calculated? There are a number of ways to establish value. Which method best satisfies the interests and objectives of owners?

How is a buyout funded? If life insurance is a funding source, is it sufficient? If a lifetime buyout is planned, can it be pre-funded (at least partially) and designed to minimize overall taxes?

At LWBJ, we work closely with business owners across Iowa to help them plan and execute successful exit and succession strategies. Along the way, we also help them build better, more profitable and sustainable businesses.

Please contact us with any questions.