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Missed our last feature article? The Most Useful Audit Your Business Will Ever Have

Home furniture brand Blu Dot blew up on CTV with help from Roku Ads Manager. Here’s how:

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“For CTV campaigns, Roku has been a top performer,” said Claire Folkestad, Paid Media Strategist, Blu Dot. “Comping to our other platforms, we have seen really strong ROAS… and highly efficient CPMs, lower than any other CTV partner we've worked with.”

Using Roku Ads Manager, the campaign moved from a pilot to a permanent performance engine for the brand.

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Walk into a closing room in 1990 and you would not see a multi-shareholder corporation get formed without a buy-sell agreement on the table. The corporate kit, the stock ledger, the shareholder agreement, the buy-sell, and usually a stack of life insurance applications all moved together. The lawyer would not let you leave without them. The insurance agent was often in the next chair.

That is not how it works anymore.

The LLC changed the practice of business formation. It made organizing a company simple enough that you can do it on a state website in twenty minutes for a few hundred dollars. That is a real benefit, and it has helped millions of people start businesses that might never have gotten off the ground under the old corporate formalities.

But something got left behind in the move. The buy-sell agreement, and the life insurance funding that used to sit behind it, stopped being standard. Founders agreed to handle it later, in the operating agreement. The operating agreement often never got drafted. Or it got drafted, never signed, and filed away in a drawer that no one has opened since.

The risks the buy-sell was designed to handle have not gone anywhere. They are the same five risks they were forty years ago. Lawyers call them the five Ds: death, disability, divorce, dispute, and departure. Each one becomes vastly more expensive without an operating agreement designed to handle it.

Pull out your operating agreement. If you do not have one, or if you cannot find a signed copy, that is your first problem to tackle. Without one, you are running on your state’s default LLC rules, which were not written with your business in mind, and which in many states require unanimous member consent for actions you would assume that you control. Read our prior article, Your LLC Is Missing Its Most Important Document, for what a very basic operating agreement should contain in the first place. If you do have one, find the sections that address what happens when a member dies, becomes disabled, gets divorced, wants out, or ends up in a dispute the other members cannot resolve. If those sections do not exist, or if they say something general like “the members will agree on a fair price,” you have a problem on paper that becomes a real problem the day one of the five Ds happens.

Good buy-sell language inside an operating agreement names the triggering events specifically. It sets the valuation method, whether that is a formula tied to revenue or earnings, an annual agreed value the members update each year, or an outside appraisal. It lays out payment terms, including whether the buyout is paid in a lump sum or over time and at what interest rate. It restricts transfers so that a member cannot sell their interest to an outsider without giving the company or the other members the first right to buy. And it identifies how the buyout will be funded.

Good language without funding is a promise the business may not be able to keep. If a co-owner dies and the agreement says the company will buy the interest from the estate for a million dollars, the estate is owed a million dollars. If the company does not have the cash, the buyout becomes a bank loan the surviving owners have to qualify for, an installment note that drags on the business for years, or a forced sale of assets to raise the money. The estate, meanwhile, may be a grieving spouse who needs the money now.

Life insurance solves this cleanly for the death trigger and remains the most common funding mechanism for a reason. The IRS still permits the standard structures, both cross-purchase (where the owners buy policies on each other) and entity-purchase (where the company buys the policies). The premiums are not deductible, but the death benefit pays out income-tax-free, and the policy proceeds match the buyout obligation. The check is already written before the trigger event happens.

However, the choice between term and some form of permanent life insurance matters. Term insurance with a conversion option is often the right starting point for younger, healthier partners. The premiums are a fraction of what permanent costs, the death benefit funds the buy-sell exactly the same way, and the conversion option lets you switch to permanent coverage later without re-qualifying medically.

Permanent life insurance is worth knowing about, especially if cash flow is the thing that keeps you up at night. A properly structured split-dollar policy builds cash value over time that you can borrow against. If your business hits a rough quarter, loses a major customer, or needs bridge capital for an opportunity, the policy can be a source of emergency funding that does not require a bank, a personal guarantee, or a credit committee. It belongs in the same toolkit as a line of credit and a cash reserve, and for many owners it is more reliable and cost efficient than either. The same policy that funds your buy-sell can also serve as standby liquidity for the business while you are still running it.

If your operating agreement is silent or inadequate on the five Ds, the fix is an amendment. You do not need to redraft the whole document. You and the other members sign an amendment that adds the buy-sell provisions, references the funding mechanism, and is dated and kept with the original.

As we covered in our prior article, How to Get Out of an LLC Investment, when cooperation between members exists, structure is inexpensive. When cooperation disappears, structure becomes litigation. Buy-sell amendments proposed after the first sign of a dispute often do not get done at all, because the member who senses they have leverage has no reason to give it up by signing a document that limits their options.

So, the sequence to work through is straightforward. Start with a current valuation of the business, because every other decision flows from that number (see our prior article, When You Need an Appraisal for Your Business, to get started). Decide on a valuation method for future buyouts so you are not renegotiating the math under pressure. Choose the funding mechanism, including the type and amount of life insurance, and get the policies underwritten before anyone’s health changes. Sign the amendment. Calendar a yearly review so the valuation and the coverage stay current with the business.

Part of the reason this discipline faded is the LLC’s simplicity. The form invites informality, and informality invites deferral. Part of it is that founders are focused on getting the business off the ground, not on what happens if one of them dies in year seven. Another issue is that the conversation is uncomfortable. Sitting down with your co-founder to discuss what happens when one of you dies, divorces, or wants out is not a fun afternoon. It is much easier to say you will do it later.

Later rarely comes, and the cost of not having the document is paid in legal fees, in business disruption, in relationships that do not survive the strain, and in companies that get sold or shut down because no one prepared for an outcome that was always going to happen eventually.

The LLC made it easy to start a business. It did not make it any safer to skip the documents that protect what you build.

This article is for informational purposes only and does not constitute legal, tax, or financial advice. Buy-sell agreements, operating agreement amendments, and life insurance funding structures vary by state and by individual circumstances. Consult qualified legal, tax, and insurance professionals before implementing any of the strategies discussed.

Have an interesting business question and need a free bit of advice? Send your question to [email protected]. No confidential info, please!