What Is A Continuity Buy Sell Agreement?

By Jeffrey Sternberg, JD

Accountants, attorneys and financial advisors often hear "We don't need a continuity buy sell agreement". A business, with one owner, rarely develops a business continuity plan in the event of death, disability, or loss of license. What about your business? As a financial advisor, you are operating your own business. Do you have a continuity plan in place?

For a financial advisor, whose family members are not in position to take over their business, a continuity plan is extremely important. In most states, only a licensed individual can own a financial advisory practice. Finding a compatible person to purchase the practice, prior to death or disability, allows a transition of the practice to a handpicked successor. The business continuity buy sell agreement provides the security of knowing that someone will be purchasing your practice upon the triggering event.

A continuity buy sell agreement is a written agreement between two independent business owners providing for the smooth transition of their practice if a life changing event occurs while they are still operating their practice. Without an agreement in place, the advisors' family may be forced to sell the practice at a fire sale price to third parties who may not be compatible to the advisors practice. With a carefully prepared buy sell continuity agreement; the owner of a financial advisory practice is generally required to sell his or her interest in the event of any of the following:

  • Death
  • Loss of License
  • Long Term Disability

A buy sell continuity agreement can also provide a "right of first refusal" in the event of retirement to the advisor who is obligated to buy the practice if a life changing event occurs. Before the departing owner can transfer his or her business interest, the other advisor must first be offered the opportunity to purchase that interest for the same terms. Having a right of first refusal is optional in a continuity agreement.

The continuity buy sell agreement will have in place the formula or terms to determine the fair market value of the practice. The payment terms should be provided in the agreement to eliminate any issues with the seller's family. Similar to any sale arrangement, the agreement would provide the rate of interest and the term of years in the promissory note accompanying the sale. The promissory note is the written IOU agreement. Life insurance can be used to provide payments in the event of death.

The key items in the continuity agreement would be the (i) purchase price or purchase price formula to determine the value, (ii) terms of the payment such as the initial down payment, time frame to close and promissory note format to follow and interest rate on the outstanding funds owed, (iii) the allocation of the purchase price (usually all to goodwill if the purchase is because of death since the seller can't compete or consult), (iv) the triggering event such as death or loss of license and (v) provide the buyer with a right of first refusal if agreed to by the parties if the seller decides to sell the practice while alive but before the triggering event such as in the case of retirement.

The failure of a business to plan for the life events of its owners can bring about the end of a successful business, not to mention the cash flow, which supported the owner and their family. Sensible planning, using a carefully prepared business continuity agreement, can avoid such tragedies and provide peace of mind to business owners.