For a closely held business, having a buy-sell agreement is essential. Sometimes called a “business will,” it governs the transfer of ownership when specific events occur, such as the death, disability or retirement of an owner. It helps avoid disputes and fosters the continuity of the business by outlining how ownership interests will be valued, purchased and transferred. Keeping this agreement up to date should be part of a company’s best practices.

The key features of a buy-sell agreement include: 

• Triggering events — Specified situations that require the buyout of an owner’s interest, such as death, divorce, or voluntary departure 

• Valuation methods — Provisions for how the business’s worth will be determined, such as a fixed price, formula-based valuation or independent appraisal 

• Funding provisions — Instructions for how the purchase will be financed, whether through life insurance, installment payments or other financial arrangements. 

These elements can work together to ensure a smooth transition of ownership while protecting the interests of all parties.

Failure to keep a buy-sell agreement current can lead to significant problems. If the agreement specifies a fixed valuation, the amount may no longer reflect the true market value of the business, resulting in unfair compensation for the departing owner or a financial strain on the company. Changes in tax laws or ownership structure may render key provisions ineffective or even detrimental. If a business adds new partners or experiences substantial growth, disputes can arise over who has the right to buy shares or how much those shares are worth, potentially leading to business disruption and/or legal battles.

To avoid these issues, companies should review their buy-sell agreements regularly, at least every two to three years. A review also should take place whenever a major change occurs, such as addition of new partners, significant shifts in valuation or alterations to tax laws. Updating the agreement is more effective if you work with experienced legal and financial professionals. An experienced business law attorney plays a pivotal role in ensuring the agreement remains legally enforceable, aligns with current business objectives and addresses potential issues concerning ownership transfers. Skilled attorneys can anticipate future challenges and draft flexible, forward-looking provisions.

Garcia & Gurney, A Law Corporation, located in Pleasanton, California, assists closely held businesses throughout Contra Costa and Alameda counties in drafting, reviewing and updating their buy-sell agreements. Our experienced legal counsel can help your company safeguard its integrity, protect owner interests and adapt to evolving business conditions. Call us at 925-468-0400 or contact us online for a consultation.