When two or more people decide to go into business together, it almost always is a very easy decision to make and a very good decision to make. Very rarely, however, do they put thought into getting out of the business or splitting up one day. Since we should always begin with the end in mind, relatively soon after getting the business going, the partners or co-shareholders should make a formal agreement, especially while everything is exciting and new, and determine how they want things to go when someone is ready to retire, wants to sell their interest in the entity, wants to be bought out, becomes disabled, dies, etc.
If you own a business, chances are that you have an operating agreement, however, if you have partners or shareholders in the business, do you have a properly-structured buy-sell agreement? A buy-sell agreement dictates what will happen in any number of life events which are bound to happen in the life of a partnership or where there is more than one shareholder in a corporation. These life events are things like divorce, lawsuit, malfeasance, losing a professional license, death, disability, retirement, or just wanting out of a business relationship.
Although this is rarely an urgent issue and easy to put on the backburner, the buy-sell agreement can and may become as important to the business as cash flow.
Too many times I have come across buy-sell agreements that miss a lot of potential problems. Worse still, I see so many that may require a purchase by the surviving partner, but there’s no life or disability policy to fund the purchase, or there is no side account to fund a purchase at retirement. Many times, with no insurance or side fund to fund the purchase, the business is saddled with installment payments that create a terrible cash flow strain and may sink the business.
In summary, getting a solid buy-sell agreement in place and getting proper funding is always an easy thing to push down the road. May I suggest stopping right now and sending a text to an attorney you know? Tell him you want to get this done. Hopefully, he’ll reach back out and that’s all you need to be committed.
Up next, we’ll dive into #9 of the 10 Most Common Business Owner Blind Spots series – Business Life Insurance. Stay tuned!