Business owners typically have a long list of things to review about their business periodically. Your list might include profit and loss statements, contracts, and your business plan. We would like to suggest another item to your list. It’s important to review your buy-sell agreement every year, at the very least.
Here are some reasons why.
Your Business May Have Changed
In fact, it probably has considering how COVID-19 has altered the business arena. For example, your buy-sell agreement probably contains provisions explaining business valuation if a triggering event occurs.
Does this provision still work? Modifications might allow a more accurate depiction of your company’s current and future financial condition.
You Might Need to Modify Funding Arrangements for Your Buy-Sell Agreement.
In an entity purchase buy-sell agreement, the company buys the departing owner’s interest. However, the company also has to have capital available to make this purchase.
If your buy-sell agreement is a cross-purchase agreement, the remaining business owners buy the departing owner’s interest in the company. Here, again, funds must be available when a triggering event occurs.
Upon reviewing your buy-sell, you and your co-owners might feel that you need to change the funding arrangements. Sometimes, owners will buy insurance policies to cover the costs of a buyout. If your company chose this funding method, does it still work in your company’s current situation?
It Might Be Time to Change to a Different Type of Buy-Sell Agreement
In fact, you might feel that you need to change from one kind of buy-sell to another. Maybe you initially chose a cross-purchase agreement but feel an entity purchase is a better fit now.
Some owners even find that a more hybrid approach that combines elements of cross-purchase and entity purchase agreements.
Triggering Events in Your Buy-Sell Agreement May No Longer Fit Business Conditions.
These agreements spell out what kind of situations set the buy-sell agreement in motion. Often, agreements are triggered by a co-owner’s:
- Retirement,
- Divorce, or
And sometimes, a partner may just decide to leave the business.
Does the language in your buy-sell accurately reflect potential triggering events? An objective review of you and your partners may reveal that one or more events will likely happen shortly. If so, this might be the time to start ironing out a new agreement.
An Annual Review Could Remind You of Other Important Business Issues
Finally, reviewing your buy-sell could help you locate other areas in the business that need to be reviewed or altered. For example, are changes in your partnership reflected in your current partnership agreement? Also, has your business lawyer or general counsel reviewed your company’s contracts lately? Catching potential problems now is typically better than waiting for legal disputes to arise.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.