"The Hidden Key to Business Continuity: Mastering Buy-Sell Agreements"

Building a business takes decades of effort, dedication, and sacrifice. Now imagine this: a sudden event—a death, disability, or retirement—throws the company into disarray, leaving the remaining owners scrambling to determine the business’s value, figure out payments, and decide ownership.

Without a clear roadmap, years of success and stability can unravel in an instant.

Let me share a story of a business owner who thought they had everything under control—until they didn’t.

Jack and Laura co-owned a thriving manufacturing company. Their complementary skills—Jack in sales and Laura in operations—created the perfect balance. Years ago, they set up a buy-sell agreement, confident it would protect their business in case of the unexpected.

Then tragedy struck: Jack passed away suddenly.

Their buy-sell agreement required an appraisal at the time of the event. Jack’s family brought in an appraiser who valued the business at $3 million, while Laura’s appraiser came in at $1.8 million. To resolve the conflict, a third appraiser was called in, which added months of delays, costly legal fees, and emotional strain for everyone involved.

This chaos could have been avoided with a more thoughtfully structured agreement.

The Overlooked Essentials:

Many business owners have buy-sell agreements, but they often overlook two critical elements:

1. How the Business Will Be Valued: Outdated or verbal valuations often lead to disputes. Different methods (e.g., gross revenue, EBITDA, or agreed formulas) yield vastly different results. Market conditions and tax implications add complexity.
2. How Payments Will Be Structured: Cash-out options can strain liquidity. Installments often lack clarity on terms like interest rates or timelines. Absence of funding mechanisms, like life insurance, can leave buyers struggling.

Without clear terms, the buyer risks financial strain, and the seller’s family could be left in limbo. To protect all parties, a well-structured buy-sell agreement is essential. Here’s how to ensure it’s done right:

1. Choose the Right Agreement Type: Cross-Purchase: Ideal for small ownership groups. Redemption: Best for larger ownership groups, where the company buys the interest. Hybrid: Offers flexibility by allowing the buyer to choose the method at the time of the event.
2. Clarify Valuation: Use industry-specific formulas (e.g., EBITDA multiples or gross revenue). Avoid “punt clauses” that defer valuation to appraisals at the time of the event.
3. Set Clear Payment Terms: Installments: Define down payments, interest rates, and timelines. Life Insurance: Use death benefits to fund payouts or create a sinking fund for other triggering events.

Jack and Laura’s story underscores why these conversations are crucial. With small adjustments—like setting a valuation formula or leveraging life insurance—they could have saved months of stress and protected their legacy.

As advisors, we have a unique opportunity heading into 2025: revisit buy-sell agreements with existing clients and start conversations with prospects. Together, let’s ensure every business owner has a clear roadmap to protect their hard work and legacy.

Let’s make this a priority. Ready to discuss? Let’s connect! Reach out to Jim Carpenter- Advisor relations at jim@camasadvice.com. Take advantage of our no-cost resources: Visit the Legacy Planning Academy,