Buy-Sell Agreements: Protection for Owners and Families

For businesses with multiple owners, the question is not if an ownership change will happen, but when. Retirement, death, disability, or even divorce can suddenly shift the makeup of ownership. Without a formal buy-sell agreement in place, these events can create confusion, conflict, and financial strain. A well-drafted buy-sell agreement provides clarity, ensuring that the transfer of ownership is orderly, fair, and aligned with the company’s long-term stability.

What a Buy-Sell Agreement Does

A buy-sell agreement is essentially a contract between owners that sets the rules for what happens if one of them leaves. It covers:

• Triggering events such as retirement, death, disability, or bankruptcy.
• Valuation method to determine the fair price of the departing owner’s interest.
• Funding arrangements to provide liquidity for the purchase.
• Transfer restrictions to prevent ownership from falling into unwanted hands.

The agreement functions like a roadmap, removing uncertainty during difficult moments.

Common Valuation Approaches

One of the most contentious issues in ownership transitions is price. A buy-sell agreement can defuse disputes by specifying valuation methods in advance. Options include:

• Fixed-price agreements, updated periodically.
• Formula-based methods, such as multiples of revenue or EBITDA.
• Independent appraisals conducted at the time of transfer.

The key is not which method is used, but that all parties agree on it in writing before conflict arises.

How to Fund a Buy-Sell Agreement

Knowing the price is only part of the equation—partners must also be able to pay it. Many buy-sell agreements are funded with life or disability insurance policies. When a triggering event occurs, the policy provides cash for the surviving partners to purchase the departing owner’s share. This approach avoids draining working capital or taking on excessive debt. For retirements or voluntary exits, installment payments or company reserves may be appropriate.

Consequences of Not Having an Agreement

Without a buy-sell agreement, transitions can become chaotic. Heirs of a deceased partner may inherit ownership without the desire or ability to contribute. Disputes over value can escalate into lawsuits. In worst cases, uncertainty drives away clients, employees, or lenders, weakening the business at its most vulnerable time.

Building Stability and Protecting Families

A buy-sell agreement protects more than just the business—it protects families. Heirs receive fair compensation rather than an illiquid ownership stake they may not want. Remaining partners avoid disputes and maintain continuity. And the business itself can keep running without the distraction of ownership uncertainty.