Key Takeaways
- Don’t Let an Old Agreement Make a Tough Moment Worse. If your buy-sell agreement hasn’t kept up with your business or your goals, it could cause confusion or conflict when it’s time to make a big decision. Make sure it still fits where you are today.
- Plan for Life’s What-Ifs. Life happens—retirement, disability, divorce. Your agreement should clearly spell out what happens next when ownership might need to change hands.
- Make the Buyout Fair — and Doable. Everyone benefits when there’s a clear, realistic plan for pricing and paying out an owner. Think flexible terms, fair valuations, and funding options like insurance to ease the financial load.
Why did you charge your phone last night? Pack an extra pair of socks? Why did you bring an umbrella on a cloudy day? Check your zipper? If something can go wrong – unacceptably wrong – you’ll plan. That’s what successful people do.
“If something can go wrong, it will” is Murphy’s Law, which is simply an awareness that systems can fail, especially ones requiring human inputs. It’s easy to adapt that maxim to business planning. If you have an unacceptable risk, then you should plan to avoid, reduce or transfer it. When the pain of failure is high, fail-safes are required. That’s why you buy insurance, keep books, save, and set targets that promote order and discourage chaos.
Imagine a well-functioning business with good leaders and responsible owners. The owners have always thought they could hold the business indefinitely, build it to sell it, or transfer it to one or more key people. Equity is in the right hands for the time being, but there is talk of bringing some additional team members into the equity circle. By adding partners or stockholders, problems could arise if relationships end suddenly or completely.
What the owners lack is control over the endgame. They have an outdated buy-sell agreement written before the business value grew and their own attitudes changed. If Murphy’s Law strikes, they can’t be certain to close a deal among themselves that will meet reasonable personal and business goals. They need a reality check.
That’s where LBMC’s Business Valuation Services team becomes an essential part of the process. With decades of experience working with private companies across industries, LBMC helps business owners determine accurate, defensible valuations that support fair buy-sell agreements.
LBMC’s Memphis business advisors help local owners review and update buy-sell agreements so they’re fair, current, and built to protect what matters most — supported by five additional LBMC offices across Tennessee and the Southeast.
Whether you’re pricing a one-time event or planning for potential future triggers, an objective business valuation ensures all parties are protected and aligned.
“Business owners cannot afford to rely on buy-sell agreements containing outdated formulas or best guesses,” says Chris Lovin, Shareholder, Practice Leader, Valuation and Litigation Support Services. “We help owners build agreements based on real data, market-informed assumptions, and realistic terms — so that when the time comes, everyone knows what to expect and how to execute.”
Buy-sell and similar equity control agreements are about business ownership boundaries and contingencies. They are written to describe permitted owners and restrictions on transfers. These agreements proceed to spell out the consequences of various situations that trip a switch. At these specified times, owners will distinguish between discretionary and mandatory transfers – what they might do versus what they must do. Buyers and sellers are matched to an agreed price and to terms of payment, then a deal closes and life goes on – theoretically – as planned.
If you have a buy-sell agreement, here are some ideas to help you review “the deal” that controls your business equity.
Has the value of your business changed?
A buy-sell price can legally define an ex-owner’s parachute drop zone, so you need to know the valuation altitude on any given day. How to set a price will usually defy a cookie-cutter solution, so try to agree to an evenhanded process or combination of methods instead of a fixed price.
Are payment terms clear and reasonable?
A buyout will need money to pay the price. Your deal should promote patience, fairness and flexibility. Don’t unintentionally harm your business or the livelihoods of those involved. Consider insurance and installment arrangements.
Have you restricted transfers?
Like a personal will for an estate, you are legally naming who takes part in a deal. Name these permitted allies to keep control and benefits within a desired owner group. To relax a restriction, consider requiring consent of other owners.
Have you covered the proper trigger events?
Trigger events are normally death, disability, retirement, termination of employment, and transfers arising from divorce, bankruptcy, or similar legal events. If these aren’t built into your plans, they probably should be.
Are all owners and trigger events the same?
Sometimes an equitable deal is not perfectly symmetrical. Depending on circumstances, it could be fair to give rights to some owners but not others.
Have you considered the tax consequences?
Depending on the type of business entity, involvement of certain family members, the buyout structure, and other factors, there can be important income, gift, or estate tax issues to consider.
If something can go wrong, you’ll urgently need a system that works. Review your buy-sell agreement. You’ll be glad to have this part of your plan in place.
Ready to protect your business with a current, well-structured buy-sell agreement?
LBMC’s business valuation and advisory experts help business owners align ownership agreements with today’s realities and tomorrow’s goals. Whether you’re preparing for retirement, planning a partner buyout, or bringing in new shareholders, we’ll help you build a clear, tax-efficient exit strategy supported by accurate business valuation. Start the conversation today to ensure your agreement reflects your company’s true value and long-term vision.
Content provided by Alex Ivy, CPA, CFA, ASA. Alex is a shareholder in the LBMC Memphis office. He provides business wealth planning, valuation and tax services to business owners and their advisors. Contact him at alex.ivy@lbmc.com.