The Importance of an Up-To-Date Buy-Sell Agreement
NOTE: We use the term buy-sell agreement, interchangeable with Operating and Partnership Agreements.
It’s essential to plan for unexpected events in the dynamic world of business. Regularly updating your company’s buy-sell agreement is one important way to do so. Buy-sell agreements are binding contracts that outline when owners can sell their interest, who can buy the owner’s interest, how the business will be valued, among numerous other specifications. These agreements have proven to be valuable for business owners, providing a framework for handling and ensuring smooth transitions after divorce, death, retirement, disability, disputes among co-owners or other documented triggering events.
A buy-sell agreement is a living document that should be regularly reviewed and updated to reflect the evolving nature of a business. One of the most important aspects of a buy-sell agreement is the valuation, which determines the ownership interest value at the time of transfer. The value of a business may change due to many factors, including business performance, changes in the market, or changes in the industry. Keeping a buy-sell agreement business valuation up to date is essential to avoid unnecessary disputes, underpayments, or overpayments in the event of unexpected, yet nearly guaranteed, ownership changes throughout a business lifetime.
Relying on outdated buy-sell agreements places additional risk on the owners’ families and co-owners. In the event a partner unexpectedly passes, his/her family will be entitled only to the value outlined in the latest buy-sell agreement. If the business value has changed since the latest valuation, a discrepancy will appear between the fair market value and transferable ownership interest value outlined in the agreement. This discrepancy will then leave the owners’ family entitled to a transferable value greater or less than the fair market value. Up to date agreements not only protect families from receiving less than fair market value, but also protect co-owners from paying a premium should the business value decrease since the latest agreement. To ensure loved ones and co-owners are treated fairly in the ownership transfer, it’s critical to keep buy-sell agreements up to date.
Attorneys typically choose a valuation analyst to determine the value of a business. Regardless of who is chosen, the expert should possess the knowledge and experience that uniquely qualifies them as a specialist in the field. This typically includes various graduate degrees, credentials, memberships in professional societies, and experience in providing expert witness testimony.
Regular consultation with legal counsel and valuation experts is essential to keep your buy-sell agreement up to date and aligned with your business’s current financial positions. If you’re in need of assistance with your buy-sell agreement, please contact David Consigli at dconsigli@fazforensics.com.