The Hidden Risks of Not Having a Buy-Sell Agreement

If your business has multiple owners, there’s one document you absolutely need but might be overlooking: a buy-sell agreement. This essential document spells out exactly how an owner can sell their stake in the business, whether to another partner or a third party. Think of it as a roadmap for what happens when an owner—or their estate—wants to exit the business.

Why Peace of Mind Matters

Getting a buy-sell agreement in place is similar to organizing your personal affairs before an unexpected life event. It provides clarity and removes uncertainty during what can already be a stressful time. Without this document, determining what the business is worth becomes costly, both financially and emotionally. A buy-sell agreement offers peace of mind, knowing that everyone understands the process and expectations from the start.

The Real Risks of Going Without

The consequences of not having a buy-sell agreement can be serious and far-reaching. Here are the hidden risks that could impact your business and personal finances:

Unwanted Partners

Without a buy-sell agreement, your partners could attempt to sell part of their stake to someone you don’t know without your approval. Suddenly, you might find yourself in business with a stranger who doesn’t share your vision or values. This scenario often leads to disputes, legal action, and mounting costs that could have been avoided with proper planning.

Valuation Disputes

When exit time comes, partners may have vastly different opinions about what their portion of the business is worth. Without a formal agreement establishing valuation methods, these disagreements can quickly escalate. One partner might believe their stake is worth significantly more than others think it should be, creating conflict that damages both business relationships and the company’s value.

Unexpected Estate Tax Problems

Estate planning intersects with business planning in ways many owners don’t anticipate. If you’re expecting your business interest to be valued at a certain amount for estate tax purposes, but it comes back much higher, your heirs could face a significant tax bill they weren’t prepared for. A buy-sell agreement helps manage this risk by establishing clear valuation guidelines.

Costly Legal Battles

Disagreements between owners are the most damaging consequence of not having a buy-sell agreement. When partners can’t agree on terms, exit strategies, or valuations, lawsuits often follow. Legal fees quickly add up, relationships deteriorate, and the business suffers. These battles drain resources that could be invested in growing the company.

Tax Uncertainty

The tax implications of a business transfer can be complex and surprising. Without a buy-sell agreement, owners may have misconceptions about what taxes they’ll owe or what their tax situation will be upon exit. This uncertainty creates risk that can result in unexpected tax liabilities.

Taking Action

A buy-sell agreement has become a must for any business with multiple owners, whether structured as a partnership or corporation. The good news is that this agreement doesn’t need to be in place on day one. However, you should establish it within the first few years of founding your business.

It’s also important to remember that a buy-sell agreement is a living document. As your business grows and conditions change, the agreement can be amended. Nothing is set in stone, allowing you to adapt as circumstances evolve.

In some cases, buy-sell provisions can be incorporated into another business agreement, such as your operating agreement or partnership agreement. As long as these provisions are formally documented somewhere, you’re protected.

Partner with CJG Partners

At CJG Partners, we help business owners navigate complex planning decisions that protect both their companies and personal interests. We translate complicated legal and tax concepts into straightforward strategies, giving you clarity about your financial picture and confidence about your company’s future. Contact us today to discuss whether your business needs a buy-sell agreement and how we can help you establish one that provides lasting peace of mind.