Funding Your Buy-Sell Agreement

Buy-Sell agreements provide for the transfer of the ownership of the business in different circumstances – death, disability, retirement or disagreement. At death or disability, for example, the remaining owners may not want to be in business with the deceased owner’s heirs or the non-active disabled owner. As well, the heirs or disabled owner may prefer to receive the value of their share of the business in cash. If an owner retires, an agreement paves the way for business as usual. If the owners have a falling out, a buy-sell agreement will enable the business to continue to be “wound up” in an orderly fashion.

A buy-sell agreement should deal with:

Define the triggering points, including what they are and when they are triggered (death, disability, retirement, buy-out, shot gun, sale, etc).
Who will buy the shares
What the terms of the sale will be
When the sale will take place
Where the money to buy the shares will come from
How much the purchase price of the shares will be

The goal is simple: satisfy all parties so the business can get on with business. Although a buy-sell agreement is a legal document, it still needs to be properly funded. The buyout can be funded via corporate cash; personal cash; borrowed cash (corporate or personal); or insurance. The most cost-efficient way to fund the buy-out is insurance. If it isn’t, an unexpected crisis could cause serious financial concerns for the business and its owners.