5 Buy-Sell Funding Mistakes That Can Destroy a Partnership

The Agreement Without the Funding

Most multi-owner businesses have a buy-sell agreement in their corporate documents. Far fewer have the funding structure to actually execute it. When a triggering event happens, death, disability, or departure, the gap between "agreement" and "executable agreement" becomes the difference between a clean transition and a crisis.

The Five Mistakes

1. No funding mechanism at all. The agreement specifies a price formula and a payment schedule but leaves the surviving owners (or the entity) to come up with the cash. In practice, that means selling assets, taking on debt, or defaulting on the agreement.

2. Stale valuations. The agreement references a valuation methodology that hasn't been updated in years. The number the agreement produces no longer reflects what the business is actually worth.

3. Mismatched ownership structure. A cross-purchase agreement with seven owners requires 42 policies. An entity-purchase structure with the wrong tax treatment creates unintended consequences. The structure has to match the ownership reality.

4. Underfunded coverage. Coverage exists but only covers a fraction of the buyout obligation. Surviving owners are left to fund the difference at the worst possible moment.

5. No disability or departure trigger. The agreement only addresses death. Disability and voluntary departure, far more common triggering events, have no funding behind them.

Structural Fixes

Each mistake has a structural fix. The fixes require coordination between the buy-sell document, the funding mechanism, and the entity's tax structure. We work alongside your attorney and CPA to align all three.