The Infamous Buy-Sell Agreement and How To Fund It

One of the groups of people I love to help is small business owners. As a entrepreneur (I have an insurance agency and a consulting business), I can relate to these people. Many have left the corporate world to take on the day-to-day struggles of owning their own operation, and in that process they wear a lot of hats. Every once in a while I will come across a business that has multiple partners with each partner filling a role that the other partners don't want or aren't as good at performing. In other words, less hats. 

My father used to say that "the worst ship to sail on is partnership". He wasn't nearly as witty as he thought he was, but I understood what he was trying to say. Years earlier he had opened a small engineering firm with someone and apparently it was a horrible experience for him. His version of events was that he was doing all the work while the other guy just took half the profits. I don't know how accurate this was, but I do know that he rarely spoke of the other partner and that the business was dissolved after a couple of years. 

I have also had some shady dealings with "partners" who didn't quite carry their part of the workload and couldn't get out of their fast enough. After losing money and feeling stressed I decided to work solo from that point on. Now I just have what I like to call "professional business arrangements", in which my income isn't reliant on the production or work ethic of someone else. 

This doesn't mean that partnerships are bad for everyone. I've seen many that work, with partners who are college friends, family members or spouses. With businesses such as hotels, real estate firms, restaurants and others, partners find a way to make the most of each person's strengths and weaknesses. And in the process, they put their egos aside and share the success of their work. 

On those instances when I do get the opportunity to work with business partners I eventually ask if they have a contingency plan if one of the partners were to die. You see, people typically think long and hard about starting a business, but few consider exiting a business, much less having a person they rely on for their income to die too soon. The responses I get are varied, from "I'm not worried about it" to "I never gave it much thought". Scary.

An old friend told me that his nephew had opened a sports pub/wing joint with a distant cousin. Neither of these two was married and both were questionable when it came to their character. "Sounds like they could use a buy-sell agreement," I said. 

A buy-sell agreement is a legal document that states that if one partner dies, the other partner has the option of buying out the dead partner's stake in the business. This is important because the surviving partner may not want to be in business with the deceased partner's widow or next of kin. Especially if they never got along in the first place. 

Sometimes the buy-sell agreement is part of the legal documents that form the business, but if not, a good attorney can write a short document that can fit the bill. The most common way to fund the buyout of dead partner's stake in the business is with a life insurance policy. 

I met with the two cousins separately. The first one I met with was cordial and I explained that if his partner were to die he would be in business with the guy's mother. He frowned and made it clear that wasn't  something he would want. He knew the guy's mother and wasn't very fond of her. 

The second partner had a different view of the world. "If you're cousin dies, you're going to be in business with his grandmother." The grandmother was a tough lady who was known for being an even tougher businesswoman.  He shrugged his shoulders as to say "so what?" 

As the first partner saw the value in what I was presenting, the second one had no desire to buy a life insurance policy on his cousin. The deal never happened, mostly because they couldn't get on the same page when it came to this or other topics. Shortly thereafter their business shut down. 

When I talk to business partners, I throw out a "worst case" scenario. "How would you like to be in business with your dead partner's widow and her new boyfriend?" As bad as it sounds, it happens more often than you would think. A good buy-sell agreement funded with an affordable life insurance policy can be a simple fix to a potential nightmare. 

If you have a business partner, or multiple partners, and don't have a buy-sell agreement in place, I highly recommend you have an attorney draw one up for you. And let us know if we can help you put a policy in place to help you fund that agreement. In the meantime, stay healthy and feel free to comment below. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast.