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How to Make a Buy-Sell Agreement Less Dangerous

Submitted by John Brown on Fri, 05/17/2019 - 9:00am
A large metal safe door with a handle and key, standing open slightly ajar, revealing four thick deadbolts.

Many business owners believe that having a Buy-Sell Agreement protects them and their businesses from the unexpected. In theory, they can. But in practice, Buy-Sell Agreements are often dangerous to business owners.

Consider a common conversation between a business owner and advisor:

A successful business owner tells her advisor that once she signed her Buy-Sell Agreement, she felt like she had solved all of her business continuity problems. When the advisor asks to review it, she resists.

“I’ve already put enough money into it,” she says. “I see no reason to revisit the issue.”

A Buy-Sell Agreement is definitely a good part of an overall business plan. But owners can do more harm than good to themselves and their businesses when they rely solely on a Buy-Sell Agreement as their shield against the unexpected.

From experience, most Exit Planning Advisors know that typical Buy-Sell Agreements deal primarily with the transfer of ownership at death. Occasionally, they’ll deal with permanent incapacitation. But overall, most Buy-Sell Agreements only ensure two things when one owner dies:

  1. The surviving owners (if applicable) receive the departed owner’s ownership interest.
  2. Ideally—and this isn’t always guaranteed—the departed owner’s estate receives fair value, in cash, for the transfer of ownership.

That’s it. Most Buy-Sell Agreements leave multiple business continuity and owner-related issues unaddressed. For example, most Buy-Sell Agreements don’t address how to dole out responsibilities that the departed owner had, which can be a huge problem if the departed owner was the company’s rainmaker. These kinds of issues can destroy the business and ruin the financial security of many people, such as the departed owner’s family, if left unchecked.

Unless advisors help owners mitigate the threats that a poor Buy-Sell Agreement creates, owners will likely hurt themselves, their businesses, and the people they care about most.

In this series of posts, we’ll share the problems most Buy-Sell Agreements cause: problems that owners most readily agree to address if brought to their attention. We’ll show how advisors can uncover these problems and work with owners to solve them. And we’ll provide ideas for how advisors can show owners the disastrous financial consequences most Buy-Sell Agreements create when done improperly.

As we discuss common problems with Buy-Sell Agreements, it’s important to remember: If an advisor wants to build trust with owners and engage them in advisory work, that advisor must show owners how to create a strong Buy-Sell Agreement in the context of a business continuity plan.

Problem 1: The Buy-Sell Agreement Ignores Threats to Business Continuity

When an owner dies or permanently leaves the business unexpectedly, the business’ existence can be thrown into jeopardy. For example, if the surviving owner of a co-owned business does not have adequate assets to satisfy the now-deceased owner’s personal guarantees, what happens once financing is pulled due to the owner’s death? Similarly, if the deceased owner was the company’s rainmaker or COO and no one can step into those roles, will the business survive?

Buy-Sell Agreements are typically inadequate when addressing business continuity issues. All they do is provide direction about who gets ownership. They don’t address how the new owner(s) can address all the problems the departed owner’s departure caused, instead relying on a wing and a prayer.

How can advisors address this problem?

The ideal but long-term solution is to develop a next-level management team. Next-level management teams give a company’s cash flow enough cushion to handle an owner’s departure, no matter whether the owner dies, get hurt, or leaves voluntarily during their lifetime.

The downside is that creating a management team from scratch can take years. But until advisors help owners install next-level management teams, the business is at risk if an owner-operator dies. Advisors must urge owners to start creating a next-level management team as soon as possible.

As they begin building next-level management teams, owners and advisors do have some short-term solutions to the business continuity problem. The immediate fix is to buy life insurance on the owner’s life for two reasons:

  1. Eliminate debt arising from any personal guarantees.
  2. Fund the hiring of next-level management to quickly fill the shoes of the departed owner.

In both the short-term and long-term solutions to the business continuity problem, the advisor—not the owner—is responsible for assuring that the owner addresses business continuity. Owners aren’t likely to think of these challenges. Advisors must initiate discussions about all of the effects that an owner’s death or incapacitation can have on a business. It is the advisor’s responsibility to help owners mitigate those threats. The upshot is that doing so leads to more trust and better working relationships.

Problem 2: The Buy-Sell Agreement Is Too Simplistic

Incapacitation, divorce, bankruptcy, termination of employment, retirement, and unresolvable business disputes among owners: Each of these instances is a more common exit event than death. Most Buy-Sell Agreements do not address these events with the same detail and thought as death. They should though, because any of these lifetime events can trigger the need to transfer ownership and are more likely to occur than death.

Most Buy-Sell Agreements pay only lip service to lifetime transfer events. For example, a Buy-Sell Agreement may allow remaining owners to buy a departing owner’s interest at a determinable price using an installment note paid over many years. Many advisors know—from designing lifetime transfers from departing owner to incoming owner (the typical inside transfer event)—that installment notes are income tax inefficient and drain a company’s cash flow.

The solution to this problem is to create a properly structured plan that is both tax efficient and addresses common lifetime ownership transfers. The difficult part for some advisors is that creating a properly structured, tax-efficient plan for lifetime ownership transfers requires knowledge of and experience in the use of specialized planning tools and documents. The typical business owner does not have that knowledge. Neither do most advisors who suggest and draft Buy-Sell Agreements that focus on an owner’s death. To create proper plans, advisors must identify professionals who are trained and experienced in lifetime Exit Planning.


  • Owners and many advisors wrongly assume that a Buy-Sell Agreement addresses all issues caused by a business owner’s death.
  • Advisors who understand that most Buy-Sell Agreements inadvertently ignore threats to business continuity open the door to long-term client representation, specifically, through Exit Planning.
  • Most business owners exit their businesses during their lifetime, not by death.
  • The provisions in most Buy-Sell Agreements are woefully inadequate in dealing with lifetime business exits. Advisors who can spot these deficiencies and explain them to owners add value to their client engagements.


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