Isn't That Rich Podcast

Protecting Your Business with a Buy-Sell Agreement: What You Need to Know

When you start a business, the last thing you want to think about is what happens if things fall apart—whether due to death, disability, or a split between partners. But that’s exactly why every business owner should understand the power of a buy-sell agreement.

We sat down with two of FSB Insurance’s top agents, Nathan Ashby and Eric Witges, to break down what a buy-sell agreement is, how to fund it, and why it’s something even small businesses shouldn’t ignore.

What Is a Buy-Sell Agreement?

Think of a buy-sell agreement like a prenup for your business. It’s a legally binding agreement between business partners that outlines what will happen if one of them passes away, retires, becomes disabled, or wants out of the business.

While that might sound like something only big corporations need, Nathan and Eric quickly debunk that myth: this is just as crucial for the small plumbing company down the street or your family-owned farm as it is for a major firm.

“We see too many people assume they’re too small for this kind of planning,” said Eric. “But if you don’t have $100,000 just sitting in the bank to buy out a partner unexpectedly, you need a plan.”

Funding a Buy-Sell Agreement with Insurance

So how do you fund a buy-sell agreement?

You start with the agreement itself—which outlines the “what if” scenarios—and then fund it, typically using life insurance policies. Each owner buys a policy on the other. If one partner passes away, the other partner receives the life insurance payout and uses that money to buy out the deceased partner’s share of the business from their family or estate.

For example, if a business is worth $1 million, each partner could hold a $500,000 policy on the other. If Partner A passes away, Partner B receives the $500,000 tax-free payout and uses it to buy out Partner A’s family.

That tax-free payout and quick access to funds helps avoid things like rushed asset sales or business disruption during a tragic time.

It’s Not Just for Death

Although buy-sell agreements are often tied to death, they can be just as useful in other life changes—like retirement, disability, or even a business “divorce.”

In some cases, policies with cash value, like universal life insurance, can be used even if both partners are still alive. Business owners can borrow from the policy’s accumulated value to buy out a partner or invest back into the business.

“One of our clients, a farmer, borrows from his policy every year for seed costs and repays it after harvest,” Nathan explained. “He’s essentially acting as his own bank.”

Buy-Sell vs. Key Person Insurance

These two types of policies are often confused, but they serve different purposes:

• Buy-sell insurance is between business owners to fund a transition in ownership.
• Key person insurance protects the business if a critical employee or owner (not necessarily a partner) passes away, helping offset lost revenue or disruption.

You can have both policies—and in many cases, you should.

How to Get Started

If you’re a business owner without a buy-sell agreement in place, here’s what Nathan and Eric recommend:

Step 1: Get a Business Valuation

This is essential to determine the amount of insurance you’ll need. Your accountant or attorney can help with this.

Step 2: Work with an Attorney to Draft the Agreement

This legal document outlines the terms of the buyout and triggers for activation.

Step 3: Fund the Agreement with Life Insurance

That’s where Nathan and Eric come in. They’ll help you choose the right policy, go through the medical exam process, and get everything underwritten.

And no—it’s never too late to start. Whether you’re launching a new venture or have been in business for 20 years, a buy-sell agreement can still be put in place.

Common Misconceptions

Let’s clear up a few things that often hold business owners back:

• “We’re too small for that.” False. If you can’t afford to lose a partner financially, you’re not too small.
• “We already agreed on things verbally.” Great—but verbal agreements won’t help you in court or with grieving family members.
• “It’s too expensive.” Term policies are incredibly affordable, and plans can be customized to fit your budget.

“You can find something for any business at any price point,” said Nathan. “And the peace of mind is priceless.”

The Human Side

Eric shared that the hardest part for most clients isn’t the paperwork or the premiums—it’s the emotional weight of talking about death, disability, or separation from someone you built a business with.

“But having that conversation now makes things so much easier later,” he said. “It protects your legacy and your loved ones.”

Final Thoughts: Start the Conversation

If there’s one takeaway from this episode, it’s this: start the conversation.

Talk to your business partner. Ask the “what if” questions. Then get with your accountant, attorney, and insurance agent to put a plan in place.

Because it’s not just about your business—it’s about your life, your family, and the future of everything you’ve worked so hard to build.