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.