Your business general liability policy usually covers liability threats from the outside, but what happens when the liability occurs within your business and threatens ownership interests? If your partner suddenly quits, becomes disabled, dies or divorces, it can severely disrupt business operations.
A buy-sell agreement can ensure that your business transitions to the people you choose and protect your business revenue for long-term success. Think of it as part of a comprehensive risk mitigation strategy that usually involves life insurance as part of the deal. It’s best to carve a clear path while people aren’t in crisis and your vision is clear.
Make a plan when things are calm so you can avoid last-minute scrambling or, worse still, a new and unintended business partner who inherits shares of your business.
Unlike general liability options, some perils aren’t as obvious
A buy-sell agreement is helpful for succession and business continuity planning. When stress is high due to any of the following, people’s actions can become a liability:
- Death
- Disability
- Retirement
- Resignation
- Divorce
- Expulsion/Termination
These scenarios are unpleasant, but it’s better to be realistic and plan for various possibilities in advance rather than gamble on outcomes.
Change isn’t easy, but it’s easier with a solid plan
You can customize a buy-sell agreement to fit your business needs and plan for various potential outcomes, such as the following:
| Buy-sell provision example | Buy-sell provision solution or protection |
| Partner suddenly retires or quits | Specifies the amount of time required for notice, or how to handle a sudden resignation |
| Partner becomes disabled and is no longer able to work | Determines when the business has the right to buy shares, or if the disabled partner can force the sale of shares |
| Partner is expelled from the business due to criminal conduct | Details the conduct that is grounds for expulsion and how the buyout of shares will occur |
| Partner gets divorced and ownership goes to the former spouse | Specifies a buyout provision for this as a triggering event that allows the partners to buy back shares |
| Partner dies and one or more heirs inherit shares | Determines if and how a buyout will occur when an outside party inherits shares |
| Buyout payment terms | Determines the payment terms for a buyout (monthly or cash payment) |
| Life insurance on each partner to fund contract | Forces life insurance policies to be in place to fund a buyout of shares (the business can insure the partners or the partners can insure each other) |
| Right to force a buyout | Details the events that allow the business or a partner to force a buyout |
| Right of first refusal of buyout | Describes when the remaining partners have the first right to buy shares before anyone else can |
| Valuation of the business | Explains the way you calculate the business value and tax basis per share |
There’s no way to anticipate and avoid all risks, but you can take some time to plan for the most common scenarios now and avoid leaving your business continuity to chance. A buy-sell agreement can help prevent lawsuits, free up cash when it’s most needed and preserve the business brand.
Without a plan, you might end up fighting with the same people you’ve grown to consider family.
We can help
Buy-sell agreements can get complicated, so give yourself time to craft a contract that works best for your business structure. You’ll want to involve your attorney, accountant and insurance professional in your succession planning. We can help start the process. If you are already a client, reach out to your agent. If you are not, and you would like to learn more please give us a call at 1-800-733-2530.