Just as we encourage our estate planning clients to review their estate planning documents at least every two years, we encourage the same for our business clients with their corporate documents. One such document we definitely recommend reviewing is a buy-sell agreement.

A buy-sell agreement is similar to a will for your business: you are planning for what will happen to your business upon your death, or upon a dispute causing the dissolution of your business with any partners you might have. The agreement can identify what the value of your share of the business is, and who you might have delegated to receive your share. An article in Forbes identified five reasons to review your buy-sell agreement, and we have included deeper discussion for a few of those reasons in this post.

If your agreement is silent on key trigger events that cause partners/shareholders to leave the company or sell their interest, then it’s not properly drafted. The rule for buy-sell agreements is that if it does not have the “5 D’s”, then it is not completely protecting your business and your interest. The 5 D’s of buy-sell agreements are: Death, Disability (or incapacity), Divorce, Departure (departure can be caused from a partner or shareholder’s retirement, insolvency, voluntary or involuntary termination), and Dissolution (the company dissolves). Many agreements only include what should happen to a partner’s interest when they die, but in reality, you should think of all the possibilities that can arise. Make sure your agreement has provisions for these events, and if not, it is definitely time for an amendment to the agreement.

Another issue that can affect your buy-sell agreement is if you failed to obtain some sort of spousal consent or acknowledgement to the agreement itself. Divorce is very common these days, and it can get messy when there are business interests involved. There are different ways to include the spouse in the agreement. One can be to actually have the spouse be a party to the agreement, or better yet, to acknowledge they have no actual involvement in the business and understand what that implies for them. Another way is to add a provision specifically dealing with what happens upon a divorce (as it is one of the D’s of buy-sell agreements we noted above). If you have gotten married since the execution of a buy-sell agreement, or if you are unsure if you have such provisions in place, make sure to review the agreement.

As with all proactive planning, you have to be certain that it is actually protecting your interests adequately. We are here for you if you would like a review of a current buy-sell agreement you have, or if you would like to prepare a new one. Feel free to schedule a complimentary consultation to get started! 818.956.9200

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