Keeping Buy-Sell Agreements Current
Why regular review of buy-sell agreements protects your business interests and ensures operational continuity.
The Critical Importance of Periodic Buy-Sell Agreement Review
A buy-sell agreement serves as a foundational legal document for any multi-owner business, establishing clear procedures for what happens when an owner departs, becomes disabled, or passes away. However, many business owners treat this agreement as a static document, creating it once and then filing it away without further consideration. This approach exposes businesses to significant risks and missed opportunities. The business environment, ownership structure, financial position, and applicable tax laws are constantly evolving, making periodic review not merely advisable but essential for protecting your interests and ensuring your agreement continues to serve its intended purpose.
Business circumstances change at varying speeds. Some changes occur gradually, while others happen suddenly. An agreement crafted five or ten years ago may no longer reflect your current business reality, ownership dynamics, or financial capacity. Regular reviews allow you to identify gaps, outdated provisions, and misalignments between your agreement and your actual business needs. This proactive approach prevents costly disputes, ensures smooth ownership transitions, and protects both the business and individual owners from unexpected complications.
How Business Growth and Structural Changes Necessitate Agreement Updates
As businesses grow and evolve, their ownership structures often change in ways that impact the relevance of existing buy-sell agreements. A company that started with two equal partners may now have six shareholders with varying ownership percentages. New investors may have joined the business, or some original owners may have reduced their stakes through gradual exits. Additionally, business entities sometimes change their legal structure—transitioning from a partnership to a corporation or from a C-corporation to an S-corporation for tax purposes.
Each of these structural modifications can affect how a buy-sell agreement functions. An agreement designed for two partners may include provisions that become impractical with four shareholders. Valuation methods that were appropriate when the business was small may no longer accurately reflect value as the company expands and diversifies its operations. Purchase mechanisms that worked with a limited partner group may create complications when multiple parties must coordinate to fund a buyout.
Consider also the scenario where a business has added new shareholders through employee stock ownership plans or equity compensation programs. These additions fundamentally alter the ownership landscape and may require modifications to triggering events, valuation methodologies, or funding mechanisms outlined in the original agreement. Without updating your buy-sell agreement to account for these new shareholders, you risk creating situations where the agreement’s provisions conflict with actual ownership reality.
Valuation Methods and Financial Accuracy
One of the most critical components of any buy-sell agreement is the valuation mechanism—the method used to determine what a departing owner’s stake is worth. Many agreements establish fixed prices, formulaic approaches, or require periodic appraisals. However, if these valuation methods are not reviewed regularly, they can become increasingly disconnected from actual business value.
A fixed price established years ago may now severely undervalue or overvalue the business. If the company has experienced substantial growth, a fixed valuation could leave the departing owner inadequately compensated while burdening remaining owners with excessive payment obligations. Conversely, if business performance has declined, a stale valuation might overcompensate the departing owner at the remaining owners’ expense.
Formulaic approaches—such as those based on revenue multiples, earnings calculations, or asset values—may have made perfect sense when the agreement was drafted but no longer accurately reflect how your business creates value. As your company evolves, perhaps shifting from product sales to service delivery or incorporating new revenue streams, your valuation formula may fail to capture these changes appropriately.
Regular reviews allow you to recalibrate valuation methods to ensure they remain fair and accurately represent your business’s true worth. This protects all parties: departing owners receive fair compensation, remaining owners avoid overpaying for departing interests, and the business itself benefits from the clarity and confidence that comes with accurate valuations.
Funding Mechanisms and Financial Capacity Assessment
Beyond determining what a departing owner’s interest is worth, buy-sell agreements must address how that purchase will be funded. Common funding mechanisms include cash reserves, bank financing, insurance proceeds, asset sales, or employee stock ownership plans. The funding method specified in your agreement should align with your business’s financial capacity at the time a buyout occurs.
However, financial circumstances change. A business that could easily tap into cash reserves five years ago may now have limited liquidity due to expansion investments, equipment purchases, or changing market conditions. Conversely, a business that relied on bank financing when the agreement was drafted may now have stronger cash positions or different lending relationships.
If your agreement requires funding mechanisms that no longer match your business’s financial reality, you face serious problems when a buyout trigger occurs. The remaining owners might lack the ability to fund the purchase as outlined, potentially forcing unwanted outcomes: selling company assets to raise capital, taking on excessive debt, or defaulting on the buyout obligation entirely.
Annual reviews allow you to assess whether your agreed-upon funding mechanisms remain viable and sufficient. If changes are needed—such as modifying insurance requirements, adjusting the role of cash reserves, or incorporating additional financing sources—addressing these adjustments proactively prevents crises when buyout triggers actually occur.
Life Insurance and Insured Buy-Sell Arrangements
Many buy-sell agreements incorporate life insurance as a funding mechanism, with insured buy-sell arrangements representing a particularly popular approach for ensuring buyout funds are available when an owner’s death triggers the purchase obligation. In these arrangements, each owner typically owns and maintains a life insurance policy on the other owners’ lives, with the company named as beneficiary.
Life insurance policies require ongoing management and monitoring. Premiums must be paid consistently to keep policies in force. Additionally, the coverage amounts specified in these policies should reflect current business valuations. If your business has grown significantly since the policies were established, existing coverage may be insufficient to fund a full buyout. Conversely, if coverage amounts far exceed current business value, owners may be overpaying for unnecessary insurance.
Policy reviews should verify that coverage remains adequate, beneficiary designations are correct and aligned with your current agreement, and that no policies have lapsed due to nonpayment. Some business owners discover during ownership transitions that critical insurance policies have been inadvertently allowed to expire, creating catastrophic funding shortfalls exactly when the buyout proceeds are most needed.
Tax Law Evolution and Its Impact on Buy-Sell Agreements
The tax landscape is perpetually shifting as legislatures revise tax codes, regulations change, and court decisions affect how transactions are treated. These changes can significantly impact the tax efficiency of buy-sell arrangements and the actual financial consequences for departing owners and their heirs.
Valuation methods, for instance, have important tax implications. The Internal Revenue Service scrutinizes buy-sell agreements to ensure valuations are reasonable and not artificially depressed to avoid taxes. Changes in tax law may affect which valuation approaches are most tax-efficient or legally defensible. Additionally, the treatment of buy-sell proceeds—whether as income, capital gains, or something else—can shift based on tax law changes, affecting the net benefits each party receives from the arrangement.
Gift and estate tax considerations also evolve. If your agreement is designed to minimize estate taxes, changes in estate tax exemption levels, tax rates, or applicable regulations may render your tax strategy less effective. A buy-sell agreement that was optimized for the previous tax environment may no longer serve its intended tax-minimization purposes.
For these reasons, many tax professionals recommend reviewing buy-sell agreements at least annually or whenever significant tax law changes occur. This ensures your agreement remains tax-efficient and that the financial outcomes anticipated when the agreement was drafted still hold true.
Triggering Events and Changing Circumstances
Buy-sell agreements specify which events trigger the right or obligation to purchase a departing owner’s interest. Common triggering events include death, disability, retirement, voluntary resignation, or termination of employment. However, the relevance and appropriateness of these triggering events can change as your business and ownership evolve.
A business structure that made sense when all owners were actively involved in operations may become inappropriate if some owners transition to passive investment roles. An agreement that treats all departures identically might not account for situations where an owner wants to gradually transition out rather than make a clean break. Alternatively, your business might have developed new concerns—such as criminal activity, loss of professional licensing, or bankruptcy—that should trigger buyouts but aren’t currently addressed in your agreement.
Additionally, ownership transitions that seemed unlikely when the agreement was drafted may have become probable. If an owner is nearing retirement age, that triggering event may be imminent, making the agreement’s retirement provisions critically important to review and ensure they function as intended.
Partnership Dynamics and Relationship Changes
The relationships between business owners inevitably evolve over time. Partners who worked harmoniously for years may develop conflicts or divergent visions for the business. Conversely, relationships may strengthen, making some protective provisions in the original agreement less relevant. New owners may have joined the partnership, changing group dynamics entirely.
These relationship shifts sometimes highlight gaps or provisions in the buy-sell agreement that no longer serve the partnership’s interests. For example, an agreement may include restrictions on ownership transfers that once prevented unwanted family members from acquiring stakes but now prevent beneficial transactions. Or an agreement might grant rights of first refusal that made sense with the original partner group but create complications with the current ownership structure.
Regular discussions about the buy-sell agreement during partnership meetings allow owners to identify provisions that need adjustment based on current relationship dynamics and shared business vision. These conversations also provide opportunities to address any misunderstandings about how the agreement actually functions—misunderstandings that can derail its effectiveness when buyout situations actually occur.
The Role of Professional Guidance in Agreement Reviews
While business owners may have general familiarity with their buy-sell agreements, properly reviewing and updating these documents requires professional expertise. An attorney specializing in business law can identify technical issues that non-lawyers might overlook. A business valuation professional can assess whether current valuation methods remain appropriate. A tax advisor can evaluate whether the agreement remains tax-efficient under current law.
Many business owners hesitate to engage professionals for agreement reviews, viewing it as an unnecessary expense. However, this perspective misses the potential costs of maintaining outdated or problematic agreements. A single dispute over ownership transfer that results from an inadequate agreement can cost far more than the professional fees required for preventative maintenance and periodic updates.
Common Areas Requiring Updates During Reviews
While every business and agreement is unique, certain areas frequently require attention during periodic reviews:
- Ownership Percentage Adjustments: Changes to ownership stakes should be reflected in the agreement, particularly as they affect funding obligations and valuation approaches
- Valuation Formula Recalibration: Ensuring valuation methods continue to accurately reflect business value and remain acceptable to all parties
- Insurance Coverage Updates: Verifying that life insurance policies remain in force with adequate coverage amounts
- Funding Mechanism Modifications: Adjusting how buyouts will be funded if the business’s financial capacity has changed significantly
- Triggering Event Expansion: Adding events that should trigger buyouts based on new circumstances or evolved business needs
- Tax Law Alignment: Ensuring the agreement remains compliant with current tax regulations and remains tax-efficient
- Administrative Clarifications: Resolving any ambiguities or unclear provisions that could create disputes during implementation
Creating a Review Schedule and Process
Rather than allowing buy-sell agreement reviews to occur haphazardly, successful business owners establish regular review schedules. Annual reviews represent a reasonable baseline, though businesses experiencing significant changes may benefit from more frequent assessments. Scheduling reviews to coincide with annual business planning sessions or board meetings ensures they receive adequate attention and documentation.
An effective review process should include all affected parties—all business owners and key advisors—to ensure diverse perspectives are considered. This collaborative approach also builds consensus about necessary changes and helps prevent future disputes about whether modifications were appropriately authorized.
Frequently Asked Questions
Q: How often should a buy-sell agreement be reviewed?
A: Most business advisors recommend at least annual reviews, though businesses experiencing significant growth, ownership changes, or operating modifications may benefit from more frequent assessments. Reviews should also occur whenever major tax law changes take effect or significant business circumstances change.
Q: What happens if we don’t update our buy-sell agreement?
A: Outdated agreements may contain provisions that no longer work with current business circumstances, valuation methods that fail to reflect actual value, or funding mechanisms that are no longer feasible. When buyout situations occur, these gaps can create disputes, financial hardships, or outcomes that disadvantage one or more parties.
Q: Can we modify our buy-sell agreement without hiring an attorney?
A: While minor administrative updates might be handled without professional assistance, substantive modifications to valuation methods, triggering events, funding mechanisms, or tax provisions should involve legal counsel to ensure modifications are properly executed, legally enforceable, and don’t create unintended consequences.
Q: Should we increase life insurance coverage during a review?
A: If your business has grown significantly since policies were established, increasing coverage to match current business valuation is typically prudent. A business valuation professional can help determine appropriate coverage amounts.
Q: What should trigger a buy-sell agreement review outside the normal annual schedule?
A: Significant ownership changes, major business acquisitions or divestitures, substantial changes in business value, new owner additions, major tax law changes, or significant changes in an owner’s health or personal circumstances should all prompt out-of-cycle reviews.
References
- Buy-Sell Agreements: Understanding the Basics — Mariner Wealth Advisors. Accessed January 2026. https://www.marinerwealthadvisors.com/insights/buy-sell-agreements-understanding-the-basics/
- The Importance of a Buy-Sell Agreement for Business Owners — Lathrop GPM. Accessed January 2026. https://www.lathropgpm.com/insights/the-importance-of-a-buy-sell-agreement-for-business-owners/
- What Is a Buy-Sell Agreement? — ZenBusiness. Accessed January 2026. https://www.zenbusiness.com/buy-sell-agreement-definition/
- buy-sell agreement — Wex, Legal Information Institute, Cornell Law School. Last reviewed November 2021. https://www.law.cornell.edu/wex/buy-sell_agreement
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