I meet a surprising number of co-owners who don't have buy-sell or cross-purchase agreements. Others have an agreement they haven't looked at in more than five years, or one that isn't funded by insurance. Most single owners don't understand how they can use a one-way buy-sell agreement to protect heirs or successors.
I've written before about why “someday” isn't a decision and about the structure and ownership decisions that tend to sit unmade the longest. This is the most literal version of that idea I've come across: a decision everyone involved believes has already been made but has never been revisited, or a document someone decided they didn't need because nobody ever explained the nuance.
Your buy-sell agreement, your operating agreement, your insurance coverage, your estate documents. Somewhere between when they were signed and today, you forgot that these are living documents that have to be updated as your business grows. You may not have even needed some of them when you first started, but now, without them, you're left exposed to more risk than you realize.
“Do we need a buy-sell agreement,” “do we have a buy-sell agreement,” and “would our buy-sell agreement actually do what we need it to do” are three different questions.
Your business has evolved, legal precedents have changed, and succession plans may just be starting to take shape. Maybe you've added or changed partners. Or you want to position a key employee to take over the business. Perhaps the original valuation method no longer makes sense, or you need to increase your insurance coverage. Chances are that as you've succeeded in increasing revenue, net income, and monthly recurring revenue, you've created the need to revisit old decisions and learn more about what a successful business transition — planned or unplanned — will require to protect what you've built.
The worst time to find out what changes are needed is after something's gone wrong, or when it's already too late.
Part of it is genuinely reasonable: your attorney drafted it, you signed it, and revisiting legal paperwork isn't how anyone wants to spend a Tuesday.
Or maybe you never discussed these things on the front end. Relationships are solid, and raising it now feels like inventing a problem that doesn't exist.
In either case, reviewing documents, getting a second opinion, or learning more about the intersection of complicated things like business valuation, estate planning, business continuity planning, employee incentives, and insurance might mean finding some gaps that feel overwhelming. It can be intimidating. And it wouldn't surprise me if you put off dealing with any of it until some imaginary future moment when “things slow down,” simply because all of it requires more time and attention than you feel like you have right now.
So long as nothing changes and everyone stays on good terms, this gap can remain invisible. That is, until something happens: a partner dies, becomes disabled, gets divorced, or simply wants out, and the agreement that was supposed to make the transition orderly turns out to be unworkable, underfunded, or silent on the exact situation you're facing.
Or, heaven forbid, you suddenly die or become permanently incapacitated, your spouse becomes the owner, and the management team has no way to buy back your shares and run the business, putting clients, employees, and your family's inheritance at risk.
At that point, someone is negotiating a plan under pressure, with people who are grieving, angry, or simply in a hurry, using a document that doesn't match the business as it exists today. I've watched partners, employees, and families end up here after a forced transition that was never actually designed.
It also affects the business well before any triggering event occurs. A buyer, lender, or successor doing real diligence will find an operating agreement that doesn't match reality, or a buy-sell agreement with a funding gap, and factor that risk into a lower offer.
As your company grows and you get older, it should become routine to review many of your legal and insurance documents annually.
• Confirm your buy-sell agreement's valuation method still reflects how the market would value the business today, not the formula that made sense when it was written.
Most of these conversations are with your business attorney, estate attorney, and insurance broker. You may also want to consult your tax and investment advisors. You may only need to confirm that everything is in order, or you may need to make a few changes. It is always best to have a unified, comprehensive plan and a team of advisors who are all working toward the same desired end result for you, your business, and your family.
In the next article in this series, we'll look at a different structure decision owners tend to avoid: whether the right board, advisory or otherwise, could be catching the blind spots no one currently is.
1. How often should a buy-sell agreement actually be reviewed?
As a general guide, every two to three years, or immediately after any change in ownership, a significant shift in the business's value, or a major life event for any owner. Waiting for a triggering event to reveal a gap is the most expensive way to find one.
2. What's the most common way these agreements fail when they're actually needed?
Underfunding is the most common failure. The agreement names a buyout obligation that the insurance or cash reserves behind it can no longer cover, which turns a document meant to prevent conflict into the source of one.
3. Do operating agreements need the same kind of review as buy-sell agreements?
Yes. An operating agreement that doesn't reflect current ownership, roles, or decision-making authority creates the same kind of risk: a document everyone assumes is accurate, that turns out not to be, at the exact moment accuracy matters most.
4. Is this something my attorney handles automatically?
No. Most attorneys will review documents when asked, but reviewing existing paperwork on an ongoing basis isn't typically part of any standing engagement. It has to be a decision you make and put on a calendar.
