7 Mistakes You're Making with Your Buy-Sell Agreement (and How to Fix Them)
Do you know exactly what would happen to your company if you walked into your office tomorrow
and your business partner wasn't there? It’s an uncomfortable question, isn't it? We often spend our
days focusing on growth, marketing, and operational efficiency, pushing the "what-ifs" of illness, disability,
or death to the back of our minds.
However, acknowledging these possibilities isn't about being morbid; it's about preparation. True
peace of mind comes from knowing that the legacy you’ve worked so hard to build is protected by a
robust Owner-based Planning strategy. Unfortunately, many business owners treat their buy-sell
agreement like a "set it and forget it" document: and that is where the trouble begins.
Research suggests that while most multi-owner businesses should have a buy-sell agreement, only
about one-quarter to one-third of small firms actually have a formal, written plan in place. Even fewer
have that plan properly funded. Is your agreement a solid safety net, or is it a "paper tiger" that will
fail when you need it most?
Let’s look at the seven most common mistakes we see in Business Planning today and, more importantly,
how you can fix them.
1. Using a "Fixed Price" That Hasn’t Moved Since 2018
When did you last look at the valuation of your company? Many agreements include a "Certificate of
Value" where the owners agree to a fixed price for the business. The problem? Most owners forget to
update it.
If your agreement says the company is worth $2 million because that’s what it was worth five years
ago, but today it’s worth $10 million, you’ve created a recipe for a lawsuit. The departing owner’s
family will feel cheated, and the remaining owners may face a "fair market value" dispute that could
have been avoided.
The Fix: Don’t rely on a fixed number. Instead, use a dynamic valuation formula or a requirement for
a professional appraisal. At Legacy Wealth Strategies, we recommend scheduling a valuation review
at least every two years to ensure your Business Owner interests are accurately reflected.
2. The "Connelly Trap": Misunderstanding Entity-Owned Insurance
The legal landscape changed significantly with the 2024 Supreme Court case, Connelly v. United
States. For years, many businesses used "entity-purchase" agreements where the company owns life
insurance on the owners and uses the proceeds to buy back shares upon death.
The Connelly decision clarified that if the corporation receives life insurance proceeds to fund a redemption,
those proceeds must be included in the company's valuation for estate tax purposes. This
can lead to a massive, unexpected tax bill for the deceased owner’s estate.
Myth vs. Reality
• Myth: "As long as my company has life insurance to buy me out, my family is set."
• Reality: If your agreement is structured incorrectly post-Connelly, the IRS might value your shares much higher than the buyout price, leaving your family with a tax bill they can’t afford.
The Fix: Review your funding structure. You may need to pivot to a "cross-purchase" arrangement:
where owners own policies on each other: to keep the insurance proceeds outside of the business
valuation.
3. Forgetting the "Small" Triggers: Beyond Death and Disability
Most people think of a buy-sell agreement as a "business will." While death is a major trigger, it isn't
the only one. What happens if an owner gets a divorce and their ex-spouse is awarded half of their
shares? What if an owner loses their professional license, or files for personal bankruptcy?
Without specific "triggers" in your agreement, you could find yourself in business with your partner’s
ex-spouse or a bankruptcy trustee.
The Fix: Ensure your agreement covers the "5 Ds": Death, Disability, Divorce, Departure (retirement/
resignation), and Disqualification (loss of license). You should also include a "Right of First Refusal,"
giving the company or other owners the first chance to buy shares before they are sold to an outside
party.
4. The "Paper Tiger": An Unfunded Agreement
An agreement is just a stack of papers if there is no money behind it. We often see agreements that
mandate a buyout but don't specify where the cash will come from. Will you take out a loan? Will you
use three years of cash flow?
If the business is struggling because it just lost a key partner, a bank is unlikely to lend you the money
for a buyout. This is where Term Life Insurance or Whole Life Insurance becomes a critical tool for liquidity.
The Fix: Audit your funding today. If you are relying on life insurance, check the premiums and the
"riders" (extra features like disability waivers). Make sure the death benefit actually matches the current
value of the business. If your business has grown, your coverage must grow with it.
5. One Size Fits... None: The Danger of Generic Templates
It’s tempting to download a buy-sell template from the internet and fill in the blanks. However, every
business has a unique capital structure and different tax needs. A template designed for a C-Corp
might be disastrous for an LLC or an S-Corp due to how "basis" and "distributions" are handled.
The Fix: Treat your buy-sell agreement as a custom piece of machinery. It needs to be calibrated to
your specific industry and tax status. Work with a team that understands the intersection of legal, tax,
and insurance planning.
6. The Real Estate Gap
Does your business own the building it operates in? Often, business owners hold real estate in a separate
LLC for liability protection. If your buy-sell agreement only covers the operating company and
not the real estate entity, you could end up owning the business while your former partner’s family
owns the building. This creates a nightmare scenario regarding rent increases or forced relocations.
The Fix: Link your entities. Ensure your Business Planning includes all related entities, including real
estate holdings, so that control of the "physical belongings" of the business stays aligned with the
"intangible assets" of the brand.
7. The "Sign and Forget" Syndrome
The business world moves fast. In the last few years alone, we’ve seen massive shifts in tax laws, interest
rates, and the Connelly ruling. If your agreement was signed more than three years ago, it is likely
"stale."
The Fix: Think of your buy-sell agreement like a physical check-up. You should review it annually as
part of your year-end planning. Ask yourself: Has our value changed? Have our owners changed? Has
the law changed?
Taking the Next Step Toward Security
Your business is more than just a source of income; it’s your legacy. By addressing these mistakes
now, you aren't just checking a legal box: you are ensuring that your employees, your partners, and
your family are protected from the unknown.
At Legacy Wealth Strategies, we specialize in helping the modern Business Owner navigate these
complex waters. We can work together to audit your current agreement, evaluate your funding, and
ensure your Owner-based Planning is built for the long haul.
Your To-Do List for This Week:
1. Locate your current buy-sell agreement (and make sure it’s actually signed!).
2. Check the "valuation" section: how is the price determined?
3. Confirm who owns the life insurance policies intended to fund the buyout.
Don’t wait for a crisis to find out your safety net has holes. Contact us today for a strategic consultation
to keep your business moving forward.
This material is provided for educational purposes only and should not be considered as personalized investment advice or a recommendation. Not all strategies discussed may be appropriate for every individual. Financial
professionals do not provide tax or legal advice. Individuals should consult their own qualified tax and legal advisors regarding their specific situation.
Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, /SIPC. OSJ:8425 Pulsar Place Suite 450 Columbus OH 43240, 614-785-5100 PAS is a wholly owned subsidiary of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Legacy Wealth Strategies, LLC is not an affiliate or subsidiary of PAS or Guardian. 8967295.1 Exp 6/28