27 Jun Do Sole Owners Need a Buy-Sell Agreement?

Happy Summer!

This weekend we celebrated my nephew, Jack’s, high school graduation(he’s the tall one in the pics). I can still remember visiting him for the first time after he was born when we were living in Hoboken. Time flies! It’s yet another reminder of how important it is to plan ahead, especially when you’re a business owner.

Read on . . .

Susan’s Story

Susan was the founder and CEO of a thriving company with $18 million in revenue.  As founder and 100% owner of the company, she grew it to its current valuation through deft financial management, tenacity, and visionary leadership.

But life threw a curveball that no one saw coming. Susan, in her early 50s and seemingly in good health, was diagnosed with a rare, aggressive, and fatal neurological disorder.  Within a matter of months, she was gone, leaving her company in disarray.

The CFO’s Next Moves

Kendra was Susan’s CFO at the company and her right-hand woman.  With the company in turmoil, she needed to act quickly. 

Susan had always been meticulous about her business operations.  But Kendra discovered there was no succession plan in place.  She also quickly learned that, by law, without a plan in place, Susan’s husband inherited all of Susan’s shares.   Susan’s husband had no expertise in the company and no inclination to run it.  The company would need to somehow buy back the shares from Susan’s husband in order to keep the company running.  There was no plan for this scenario or how to pay for the buy-out. 

The employees, who had always looked to Susan for guidance, were left in a state of confusion and uncertainty.  Kendra and the rest of the management disagreed about the best path forward.  The company’s momentum came to a grinding halt, and its future was in jeopardy.

What can you do to avoid this threat to your company?

The Importance of a Buy-Sell Agreement for Sole Owners

As Susan’s situation shows, the absence of a succession plan can leave your business in disarray if the unexpected occurs.  When you are the sole owner of a business, a unique set of challenges emerges when you die, retire, become disabled, or decide to step away. Unlike businesses with co-owners who can buy out an exiting partner, a sole owner risks losing the entire value they have built over many years. This situation can also jeopardize the income for the owner or their surviving family members, leave loyal employees without jobs, and prompt creditors to demand immediate payment. Receivables may become hard to collect. To address these potential issues, developing a Buy-Sell Agreement as party of your succession plan is critical to the continuity of your company.

Succession Planning for the Sole Owner (With No Business Partners)

If you can pinpoint a prospective buyer – perhaps a key person or trusted employee (like Kendra), a family member, or even a friendly competitor – you can employ an arrangement to facilitate your business succession plan.  In this setup, you agree to sell, and the buyer agrees to purchase, your business ownership upon a specified event (e.g., retirement, death, or disability). Ideally, you work with experienced advisors on determining the value of the shares to be purchased and how to handle other important factors in the deal (like how company debts and obligations will be dealt with). 

Funding the Arrangement

Typically, the buyer acquires a life insurance policy on your life to meet the financial obligations under the agreement. The buyer owns the policy and is its beneficiary, ensuring the funds to purchase the business upon your death. The buyer must maintain the policy by paying premiums and notify you before exercising any policy rights that could affect its value. If the agreement also covers disability, the buyer might also secure disability insurance to cover this obligation.

The buyer often gets a “right of first refusal” on any lifetime sale of the business by the owner. This means the owner must first offer the business to the buyer before selling it to a third party, including at retirement. Only if the buyer declines can the owner sell to a third party. This restriction ensures that the buyer, who has been paying insurance premiums, will not be left out if the owner decides to sell during their lifetime.

In conclusion, this arrangement effectively addresses the challenges faced by sole business owners. A key preliminary step is finding a willing buyer, ideally someone already familiar with and employed by the business, to ensure a smooth transition.

Plan Now

Is your business protected from life’s uncertainties?  Just as important as leading your company in the now, it is critical to secure its path in the event disaster strikes.  It’s worth it to get peace of mind that your company, loyal team, and legacy will live on after you’re gone. 

Talk to us now about how to protect your company and your legacy.    

Schedule your appointment here.