Cost: Drafting a buy-sell agreement could involve legal and financial fees. Smaller businesses or startups with limited resources might choose to forego this expense initially. Also, the uncertainty on how the buyer will finance the purchase of the shares.
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Complexity: Buy-sell agreements can be complex, and business owners might hesitate to create one due to the perceived difficulty in drafting and maintaining it.
Lack of Awareness: Many business owners are not aware of the importance of a buy-sell agreement or the potential benefits it can offer when a business has more than one shareholder. They may not fully understand how it can protect their business and their interests and their loved ones.
Procrastination: Business owners might delay creating a buy-sell agreement, thinking they can always do it later. Unfortunately, unforeseen events can occur, making it too late to establish one when needed.
Trust: In closely held family businesses or partnerships where there is a high level of trust among the owners, some may believe that a formal agreement is unnecessary. They may feel that they can handle any potential issues informally.
There may be misconceptions about buy-sell agreements, such as the belief that they are only necessary when one owner wants to sell their share. In reality, these agreements can address a wide range of scenarios, including death, disability, retirement, and divorce.
Avoidance of Difficult Conversations: Discussing buy-sell agreements often involves discussing sensitive topics, such as business valuations and exit strategies. Some owners may avoid these conversations to prevent conflict or discomfort.
It’s important for business owners to consider the potential risks and benefits of having a buy-sell agreement in place and to consult with their wealth planner to see if there is a need for an agreement to be in place. While not always necessary, these agreements can be invaluable in protecting the interests of all parties involved in a business and may reduce the stresses during an unplanned change of ownership brought about due to unforeseen circumstance.
Resolute Wealth Management offer a free service to clients for the drafting of a Standard Buy-Sell Agreement.
In our next article we will look at Key Person Insurance