Importance of Buy-Sell Agreements in Succession Planning | Meaden & Moore

Part 6 of the "Process-Oriented Approach to Family Business Succession Planning" Blog Series

The Misconception of Succession Planning

All too often, the introduction of succession planning to clients is met with resistance and dismissal. The common misconception among business owners is that a succession plan equates to a simple buy-sell agreement, not realizing the lack of attention given to reviewing or revising this document since its inception. It's critical to highlight that while a buy-sell agreement is vital, it is but one component of a comprehensive business succession strategy. Ensuring the adoption of a written succession plan and its communication to all stakeholders remains a paramount yet challenging objective.

The Dual Benefits of Updating Your Buy-Sell Agreement

Over time, it has become evident that discussions surrounding the buy-sell agreement can lead to two positive outcomes. The first is the opportunity to update the agreement to reflect current business conditions, ensuring its relevance and efficacy. The second, and equally important, outcome is that revising the buy-sell agreement often acts as a catalyst for the formal adoption of a succession plan. This emphasizes the necessity of extracting that old buy-sell agreement from obscurity, conducting a thorough review of its terms, and making the necessary updates.

Key Components of a Buy-Sell Agreement

Buy-sell agreements can vary significantly in complexity; however, they generally consist of a few critical elements: the parties involved, restrictions on transfer, triggering events, transaction prices, and payment terms. It's not uncommon for the terms that once seemed apt to become cumbersome or obsolete as time passes and business dynamics shift.

Conducting an Annual Review

An annual examination of the buy-sell agreement is a best practice that all business owners should adopt. Such a review involves:

• Evaluating Parties to the Agreement: Ensure all current shareholders are accounted for and included in the agreement, reflecting any changes in shareholder composition.
• Reviewing Agreement Terms: Assess the agreement for any outright transfer restrictions and consider whether exceptions or additions, such as estate planning trusts, should be included.
• Identifying Trigger Events: Beyond death, other events such as disability, retirement, or voluntary exit should be considered for inclusion in the agreement.
• Determining Transfer Price and Terms: The agreement should outline how transfer prices are determined, possibly involving professional valuations and considering valuation discounts for minority interests. Additionally, payment obligations and methods need reassessment to ensure they align with the current financial state of the company.

Embracing Change for Business Continuity

Change is inevitable, and the adaptability of a buy-sell agreement to the evolving needs of a dynamic business is crucial. Undertaking a serious review and potential overhaul of the buy-sell agreement is not only prudent but necessary. This process should be accompanied by a thoughtful consideration of whether a comprehensive succession plan is in place, underscoring the integral role of succession planning in securing the future of a family business.

By addressing these aspects diligently, businesses can ensure their longevity and stability, paving the way for smooth transitions and sustained success through generations.

Read other posts in our "Process-Oriented Approach to Family Business Succession Planning" Blog Series:

Part 1: Effective Business Succession Planning: A Call to Action
Part 2: 18 Must Answer Questions for Family Owned Business
Part 3: Balancing Family Relations with Family Business
Part 4: Identifying the Business Owner's Goals - Cash Flow and Financial Planning
Part 5: Identifying the Business Owner's Goals - Taxes
Part 7: Business Succession: Who Are the Stakeholders and How Can You Satisfy Them?
Part 8: Don't Let the Failure to Communicate be Your Business Succession Plan's Downfall