Most owners with partners have some kind of agreement. It says that if one owner dies, becomes disabled or leaves, the others will buy that owner’s share at a set price or by a set formula. It feels handled. Often it isn’t.
An agreement is a promise, not a payment
The agreement creates an obligation. It doesn’t create the cash. When the moment comes, the remaining owners have three choices: pay from the company’s cash, borrow, or pay from their own pockets. All three arrive at the worst possible time, when the business has just lost a key leader.
Four signs your agreement may be underfunded
- The value was set years ago. If the company has grown, the price in the agreement, or the funding behind it, may be a fraction of today’s value.
- Nobody can say where the money comes from. If the answer is “the business will figure it out,” it’s unfunded.
- Disability isn’t addressed. A disabled owner still owns their share and may still need income from it.
- Ownership changed. A new partner, a departed partner or a new class of owners can leave the funding mismatched.
What a funded plan looks like
Each owner’s share has a current value. Funding equal to that value is in place, owned by the right party, payable to the right party, and reviewed when the value changes. The family of a departed owner is paid fairly and on time, and the business keeps its cash for running the business.