The buy-sell agreement nobody re-read
You did the responsible thing. You and your partner signed an agreement and funded it with insurance. Then the business tripled and nobody went back to check whether the funding kept up.
A funded buy-sell has two halves. The agreement is the legal document that says who must sell, who must buy, and how the price gets determined. The funding is the insurance that makes the obligation payable. Business owners tend to remember signing the first one and forget that the second was sized to a specific number on a specific day.
That number was your company's value at the time. If the company is worth considerably more now, the policy is not.
What the shortfall looks like
Say two partners valued the business at eight hundred thousand and insured accordingly. Nine years later it is worth two and a half million. One partner dies.
The agreement obligates the survivor to buy the deceased partner's share at current value. The insurance covers a fraction of it. The survivor now owes the family the difference, personally, out of a business that just lost half its leadership.
The usual outcomes are all bad. Borrow against the company at exactly the moment a lender is least enthusiastic. Sell part of it. Negotiate the family down, which is how families and business partners stop speaking. Or fail to perform, which is a breach of the agreement.
An underfunded buy-sell is worse than none at all, because it creates a legal obligation without the means to meet it.
The other thing that goes stale
Valuation method. Many older agreements set the price using a fixed figure written into the document, or a formula that made sense for the business you had a decade ago. A fixed figure is a problem in both directions: it can hand a departing family far less than the share is worth, or it can obligate a survivor to pay far more.
Agreements also age structurally. A cross-purchase arrangement that worked with two owners becomes unwieldy at four or five, because the number of policies required grows quickly. An entity redemption may make more sense at that point, or the reverse, depending on how the business is taxed.
Four questions to answer this quarter
- What is the business worth today, honestly, not what it was worth when you signed?
- What does the agreement say the price will be — a fixed number, a formula, or an appraisal at the time?
- How much insurance is actually in force, and who owns those policies?
- Does the structure still fit the number of owners you have now?
If the first and third answers are far apart, you have found the gap.
How this gets fixed
Usually more simply than owners expect. Additional coverage sized to the current gap, sometimes term to cover the difference cheaply, sometimes permanent where the need clearly outlasts a term period. Your attorney reviews whether the agreement's price mechanism still works. And you put a date in the calendar to look at it again, because it will drift again.
We handle the funding side and coordinate with your attorney on the document. If you already have an agreement in place, bring it. Reading it back to you and comparing it against what is actually in force takes about half an hour and costs nothing.
Questions about your own situation? The first conversation costs nothing and commits you to nothing.