Funding Your Buy-Sell Agreement For All Scenarios
Before you execute a buy-sell agreement, make sure that you have adequately funded it.
To adequately fund your buy-sell agreement, take each event that would trigger your buy-sell agreement (death, disability, retirement, etc.) and ask yourself “If this event happened tomorrow, would there be enough available funds to purchase the shares?”
The most common mistake I find is a buy-sell agreement that can be triggered upon disability, but the company or shareholder (depending on whether the buy-sell agreement is a stock redemption or cross-purchase plan) relies solely on life insurance to fund the agreement.
A permanent life insurance policy’s cash value takes time to build. And if a shareholder becomes disabled before the cash value builds up, such a company may be forced to fund the buy-sell agreement in non-optimal ways.
About the Author
Ryan Roberts is a startup lawyer and represents technology companies through all phases of the startup process, including incorporation, seed & venture financings, and exit transactions. Click here to learn more about his practice.
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Regardless of the funding source, initial and regularly repeated business valuation is a key step.
The owners need to know what the business ownership is worth before a suitable funding alternative can be devised.
All too often business owners find that the departing partner's interest is worth substantially more than the funds available for the buyout.
Regardless of the funding source, initial and regularly repeated business valuation is a key step.
The owners need to know what the business ownership is worth before a suitable funding alternative can be devised.
All too often business owners find that the departing partner's interest is worth substantially more than the funds available for the buyout.