What would happen to your company if one of the other owners left or passed away? Would there be a smooth, preplanned transition of ownership or might you face uncertainty, financial difficulties and possibly expensive litigation?
With the loss of a co-owner such a potentially difficult issue, every business with multiple owners should have a buy-sell agreement. If you already have one, it should be kept up to date.
The primary purpose of every buy-sell agreement is to legally confer on the owners of a business or the business itself the right or obligation to buy a departing owner’s interest in the company. But there are other benefits you may have had in mind when creating yours.
For example, perhaps you want to ensure that control of the business is restricted to specified individuals, such as current owners, select family members or upper-level managers. Does your current agreement secure the company in this regard?
Another common purpose of a buy-sell agreement is to establish a price for the ownership interests. When reviewing yours, you should engage a qualified appraiser to estimate the value of those interests. In fact, your agreement may require doing so regularly.
Estate planning is also a key priority for many buy-sell agreements. If this is the case for yours, bear in mind that some important changes have taken place in this realm. For 2013 and beyond, the American Taxpayer Relief Act of 2012 raised the top rate for the gift, estate and generation-skipping transfer (GST) taxes to 40 percent. But it also retains the high $5 million gift, estate and GST tax exemptions, annually indexing them for inflation (to $5.25 million for 2013).
A buy-sell agreement can lie dormant for years. What can quickly bring it to life is a “triggering event,” which is when many companies unfortunately realize that the agreement should have been updated.