Barbara and Mary sat at the restaurant table going over legal papers from the attorney, each of them on the edge of tears throughout their lunch.

“I still can’t believe they’re gone,” Barbara said, referring to their husbands. “A car accident. Both running successful businesses, seeing their oldest kids looking at colleges, enjoying life, and all of it ended because of a stupid car accident.”

The tears were now rolling down Barbara’s face, mascara starting to run. They became widows at the same time, and their husbands were great friends, each successful in their own separate businesses. “I know,” Mary said, trying to comfort her friend. “But we have to try to figure this out. Tom is… I mean, was… a partner in a construction company, and now you own half the company. My Michael was a partner in a real estate company, and now I own half of that company. We just have to figure out what to do to get the money we need to go on.”

“But the lawyer we talked to said we had very few options,” Barbara said. “Tom and his partner got a good buy-sell agreement, but there was no life insurance to go along with it so now there is no cash in the business to buy me out. And for you Michael and his partner used legal forms they downloaded from the Internet, and now it looks like your stuck getting only a third of what Michael’s share of the company is worth. We pretty much have to decide to take what we can get or go through a year or two of court and pay some lawyers money we don’t have.”

Barbara and Mary’s situation while tragic is, unfortunately, not rare. No one expects to pass on before they are ready, and so planning can be put off for another day. Business owners in particular are extremely busy and have a lot to do, so stopping to plan for what could happen if a tragedy strikes usually becomes a low priority. But having a good plan in place with the means to execute it can be critical to a business owner’s family if tragedy does strike.

A buy-sell agreement is a contract that obligates the remaining business owners to buy out a deceased partner’s interests. Often the buy-sell agreement is drafted to provide the circumstances that trigger the buy-out provisions, the means to calculate the purchase price, timelines, and other specifics. One specific mistake usually seen in cheap, downloaded legal documents is having a set price per share. While this makes calculating a buy-out of the deceased partner’s interest easy, it may only take a few years of hard work and business expansion to triple or quadruple the value of the shares. The family is then severely shortchanged.

Another big mistake is not specifying adequate timelines for selling the business. A simple “30 days” buyout may force the sale to be done in a shoddy manner, and someone will end up losing out by not being precise or careful to meet a deadline that is too quick. Having an experienced attorney handle the drafting of the agreement is key to making sure it is done properly. If someone passes on and there is a poorly written agreement in place, it becomes too late to do anything about it.

The other critical component of a buy-sell arrangement is to have the life insurance to back up the provisions. When business partners actually take the step of writing their own buy-sell agreement by downloading templates from the Internet instead of going through an attorney, they often end up setting in place a whole series of legal obligations to pay the surviving family and never get the right advice on purchasing life insurance to back the agreement up.

Another problem likely to occur that spoils the arrangement is when business partners purchase insurance separately through an agent inexperienced in setting up buy-sell arrangements. The most common occurrence is each partner buys their own insurance policies and name their spouse or family members as the beneficiaries. When the time comes to carry through on the buy-sell agreement, the company is legally obligated to buy the shares from the family but the family has all of the money. After talking with an attorney and finding out their legal obligations, the family ends up keeping the insurance money and can force the company to come up with cash to pay for their shares.

So how is it supposed to be done? While there are numerous possibilities, the two most common ways are:

1) When there are two business partners, they execute a buy-sell agreement that creates the means to value the business on the date of death, legally obligate the family to sell the shares at that fairly determined price, and legally obligate the other partner to buy the shares at that fairly determined price. Each partner will own and be the beneficiary of life insurance on the other partner.

In the example above, if Barbara’s husband Tom and his business partner had correctly executed a buy-sell agreement and used the right life insurance, Tom would have owned a life insurance policy on his business partner, and the business partner would have owned the life insurance policy on Tom. Now that Tom passed on, the business partner would have the cash to buy-out Barbara’s inherited interest in the company… and they both would be legally obligated to make the transaction happen.

2) When there are three or more partners, the usual strategy is for the buy-sell agreement to be set up among all of the partners and the company purchases the life insurance on each of the partners. When one of the partners passes on, the insurance pays in to the company and the company then pays the family for their interest. The big difference is that the partners are not really making an agreement between each of them, but the company is making an agreement with each partner. Now the remaining partners’ shares are either increased in proportion to the shares they already have, or the stock is simply “retired” which has the same final result in terms of control by the remaining partners.

Like many areas of legal planning, it is easy for people to believe that downloading documents off the Internet to prevent problems will cover them. It becomes extremely attractive to not pay an attorney to handle the initial paperwork, but the “end of the day” costs are usually enormous and go unrealized until tragedy strikes. And it also becomes easy to simply search for the cheapest life insurance rather than use an agent who understands the process of funding buy-sell agreements. Working with the right attorney and the right insurance agent can give you real peace of mind, protect your families, and keep your business secure in case of a tragedy.