Let’s be honest. Everyone thinks the unimaginable won’t happen to them. No one likes to think about when, for one reason or another, they’ll have to leave their business. But things happen. A friend you’ve co-owned the company with for years becomes your rival. You get divorced. You get into an accident. You can’t prevent certain misfortunes – but you can plan for them.

Think of a buy-sell agreement as a last will and testament for your family. You wouldn’t leave your spouse and children with no safety net, would you? So why do that with your largest asset? Having an exit strategy can prevent possible legal fees, wasted time, stress, or business failure.

A current buy-sell agreement is one of the measures you can take now to ensure success in the future. Here are five signs it’s time to review your buy-sell agreement:

1. You don’t have a buy-sell agreement.
If you can’t remember executing one, you’ll have no idea what to expect if a “triggering event” happens. Triggering events can be anything where an owner doesn’t want to or is unable to be a part of the business. Events that trigger an owner leaving the company include death, disability, disputes between owners, or retirement.

2. A condition was included where a value would be assigned to the company on an annual basis, but you can’t recall the last time anyone stipulated to a value. 
If the original buy-sell agreement says you and the other owners would review the value of your company every year and agree to the value, but you can’t remember when you and the other owners last did that – it’s time to review your buy-sell agreement.

3. The buy-sell agreement to value your interest is based only upon broad terms such as “book value” or a formula.
There are several ways to value a company, and using only one method will not give an accurate valuation. Vague terms such as “book value” or “net income” may not provide an appropriate estimate of your company’s true value. It’s best to contact a business valuation advisor to create an approach that best suits your needs.

4. Discretionary items aren’t discussed in your agreement.
Discretionary items include compensation or perks a majority owner receives because of their position in the company. These items, though, are not necessary for the day-to-day operations of the business. For example, an owner of a company travels to Hawaii for a business conference and wants to bring their family. If they charge their family’s travel expenses as a business expense, that’s a discretionary item, and those discretionary items affect the bottom line. So if your buy-sell agreement indicates a value will be based on net income, should such discretionary items be included or excluded? These types of grey areas may lead to disputes during highly sensitive times when an owner is leaving the company.

5. Your company has grown significantly since the agreement was put in place.
If your company has undergone any significant changes, the current value of your company may not reflect what’s in the agreement. In addition, new developments may have come up that were not considered when the agreement was originally entered into.

Your buy-sell agreement is a tool that can efficiently and smoothly transition you from owner to non-owner when a triggering event takes place. It’s a preventative measure, much like eating properly and exercise is for good health.