We Have a Buy-Sell Agreement... Somewhere.

"Yeah, we have a buy-sell agreement someone put together 10 years ago."

"We were going to buy some life insurance as well but just got busy."

"I'm like 90% sure we signed the agreement though."

I've heard some version of this conversation more than once over the years.

And I understand how it happens.

Business owners spend most of their time running their businesses. They hire employees, serve customers, negotiate contracts, pay bills, deal with taxes, and handle the countless other issues that come with owning a business.

At some point, someone may have convinced them to think about what would happen if one of the owners died, became disabled, retired, or simply wanted out.

Documents were drafted.

Meetings were held.

Everyone agreed they needed to "get that taken care of."

Then the business went back to being a business.

Ten years later, everyone vaguely remembers that there was an agreement.

Somewhere.

Having a Plan and Having a Workable Plan Aren't Always the Same Thing

A buy-sell agreement can be an important part of planning for a closely held business.

Depending on how it is structured, the agreement may address what happens to an owner's interest following death, disability, retirement, termination of employment, or another triggering event.

It might give the company or the other owners the right, or sometimes the obligation, to purchase that interest.

But the existence of a document doesn't necessarily answer the more important question:

Will the plan actually work when someone needs to rely on it?

That question often requires looking beyond whether someone remembers signing an agreement.

Did We Actually Sign It?

This sounds obvious.

It isn't always.

I've reviewed business records where everyone involved believed an agreement had been finalized, only to discover an unsigned draft, multiple versions of the same document, or amendments that were discussed but never completed.

Sometimes the owners know they signed something but aren't quite sure what.

If an important part of your succession plan begins with, "I'm pretty sure we signed it," that's probably worth confirming while everyone is still around to answer the question.

Does It Still Match the Business?

Even a properly executed agreement can become outdated.

Businesses change.

Owners come and go. Ownership percentages change. Companies grow. Relationships between owners change. An owner gets married or divorced. The value of the business may look nothing like it did when the agreement was signed.

An agreement that made perfect sense when three people started a company together may not make nearly as much sense ten or fifteen years later.

The question isn't simply whether you have a buy-sell agreement.

It's whether the agreement you have still reflects the business you have today.

What Is the Business Worth?

Suppose the agreement says that one owner's interest will be purchased when that owner dies.

For how much?

Some agreements establish a formula. Others require an appraisal. Some refer to a value the owners are supposed to update periodically.

And sometimes that value hasn't been updated since everyone sat around a conference table and signed the agreement years ago.

A buyout mechanism isn't particularly helpful if the parties can't determine what the business interest is worth when the time comes to use it.

Where Does the Money Come From?

This is where the unfinished life insurance conversation often becomes important.

An agreement might require a surviving owner or the business itself to purchase a deceased owner's interest. That's useful.

But if the interest is worth $1 million, the next question is fairly important:

Where is the $1 million coming from?

Life insurance is one way businesses sometimes fund an obligation arising at an owner's death. Other arrangements may be appropriate depending on the business and the owners.

But deciding ten years ago that you were going to purchase insurance isn't the same thing as having the funding in place today.

The agreement and the funding mechanism have to work together.

What Happens If I Don't Die?

Death tends to receive most of the attention in succession planning.

But incapacity can present its own set of problems.

If an owner becomes unable to participate in the business, who can exercise that owner's rights?

Can someone vote the ownership interest?

Who has authority to make decisions?

Does the buy-sell agreement address disability or incapacity?

Does the owner's power of attorney coordinate with the governing documents?

The answer may be very different from what the other owners, or the owner's family, simply assume will happen.

What Does My Estate Plan Say?

Business succession planning and estate planning shouldn't exist in separate worlds.

An owner's Will or revocable trust may determine who ultimately receives a business interest at death.

The company's governing documents may place restrictions on what can happen to that same interest.

A buy-sell agreement may create purchase rights or obligations when the owner dies.

Life insurance may be intended to provide the money necessary to complete the purchase.

Each document can make sense on its own and still produce problems if no one has considered how the pieces fit together.

For a business owner, the business may also be one of the largest assets in the estate.

It deserves to be part of the estate planning conversation.

Find the Agreement

Business succession planning doesn't necessarily need to be complicated.

For many business owners, a useful first step may be much simpler:

Find the agreement.

Make sure it was signed.

Read it.

Confirm who owns the business today.

Consider whether the agreement still reflects what the owners actually want to happen.

Determine whether any funding contemplated by the agreement is actually in place.

And make sure the business plan and the owners' estate plans aren't working against each other.

A succession plan doesn't have to be complicated.

But it does have to exist.

And preferably, you should be more than 90% sure you signed it.