A lot of business owners believe they are protected because they signed a buy-sell agreement years ago.
But here’s the problem: many of those agreements were drafted once… then stuffed in a drawer and never looked at again.
Meanwhile, the business changed.
The valuation changed.
The ownership structure changed.
The insurance funding changed.
And in many cases, the risks changed too.
That can create major problems for both the business and the family left behind if something unexpected happens.
A Buy-Sell Agreement Is More Than Just Paperwork
At its core, a buy-sell agreement is designed to answer one critical question:
What happens if an owner dies, becomes disabled, gets divorced, retires, or leaves the business?
Without a properly structured agreement, surviving owners and family members can end up in conflict quickly.
Imagine your business partner passes away tomorrow. Do you really want to suddenly be in business with their spouse, children, or heirs if nobody planned for that transition properly?
Maybe the family wants immediate cash.
Maybe the surviving owners do not have liquidity available.
Maybe nobody agrees on what the business is actually worth.
That is how good businesses end up in court, forced into debt, or sold under pressure.
The Valuation Problem Most Owners Ignore
One of the most common mistakes business owners make is relying on an outdated valuation.
I’ve seen agreements written 10, 20, even 30 years ago that still contain old numbers that no longer reflect reality.
That creates two dangerous scenarios.
If the valuation is too low
You may have unintentionally shortchanged your family.
If your ownership interest is worth significantly more today than the agreement states, your heirs may receive far less than the business is truly worth.
In effect, you may have accidentally disinherited part of your family’s wealth.
If the valuation is too high
The remaining owners may not have enough liquidity to buy the shares.
Now the business could be forced into loans, structured payouts, or financial stress at the exact moment stability matters most.
That is why buy-sell agreements should be reviewed regularly alongside updated business valuations and potential buyout funding.
Funding Matters Just as Much as the Agreement Itself
A buy-sell agreement without proper funding is like having a parachute that may or may not open.
Many agreements rely on life insurance to fund the buyout between owners. But over time, those policies may no longer match the business’s value or the owners’ needs. Worse yet, if the guarantees are about to run out on your partner’s policy and they are now uninsurable, you’re the one going to the bank in order to keep the business.
Questions business owners should ask include:
● Is the insurance coverage still large enough?
● Are older term policies nearing the end of their guarantees?
● Is the ownership structure of the policy correct?
● Are premiums still affordable?
● Is the agreement funded in the most tax-efficient way?
These details matter more than most owners realize.
Understanding the Different Structures
Not all buy-sell agreements work the same way.
Cross-Purchase Agreements
In a cross-purchase agreement, the remaining owners personally purchase the departing owner’s shares.
One advantage is that surviving owners receive a step-up in cost basis, which can reduce future capital gains taxes when their shares are ultimately sold.
But these agreements can become complicated when there are multiple owners because each owner may need policies on the others.
Stock Redemption Agreements
In a stock redemption plan, the company itself buys back the shares.
This structure is often simpler administratively, but it may not provide the same tax advantages as a cross-purchase arrangement.
Wait-and-See Agreements
Some businesses use a “wait-and-see” structure, which gives flexibility in deciding who ultimately purchases the shares.
That flexibility can be helpful, but only if the agreement is clear and properly funded ahead of time.
The right structure depends on the business, ownership makeup, tax considerations, and long-term goals.
Death Is Not the Only Risk
A good buy-sell agreement should not only address death.
It should also contemplate:
● Disability
● Divorce
● Retirement
● Forced exits
● Owners no longer contributing equally
● Disputes between partners
● Drug and alcohol dependency
These situations happen far more often than many business owners expect.
And when emotions are high, unclear agreements can create enormous stress on both the business and the family.
Your Business Is Probably One of Your Largest Assets
For many owners, the business represents the majority of their net worth.
Yet surprisingly few business owners revisit their succession documents regularly.
That is risky.
Because when a transition happens, you do not want to discover the agreement no longer works the way you thought it did.
You want clarity.
You want liquidity.
And you want your family and business partners protected.
Review It Before You Need It
The best time to review a buy-sell agreement is before a crisis happens.
Not after a diagnosis.
Not after a dispute.
Not after a death.
A proactive review can help identify outdated terms, funding gaps, valuation issues, and potential tax consequences before they become expensive problems.
If you own a business with partners, family members, or succession considerations, now is a good time to revisit your agreement and make sure it still reflects reality.
Because just having a buy-sell agreement is not enough.
It has to be able to work as intended when it matters most.
If you’d like help reviewing your current buy-sell agreement or business succession strategy, let’s talk. Click here to schedule a conversation:https://calendly.com/doughepburn/intro-call
Doug Hepburn is an Investment Advisor Representative of and offering securities and investment advisory services through Cetera Advisors LLC, a broker/dealer and a registered investment advisor, member FINRA, SIPC. Cetera is under separate ownership from any other named entity. Home office address: 508 Elm Avenue, Suite 100, Phoenixville, PA 19460.
Cetera Advisors LLC exclusively provides investment products and services through its representatives. Although Cetera does not provide tax or legal advice, or supervise tax, accounting or legal services, Cetera representatives may offer these services through their independent outside business. This information is not intended as tax or legal advice.