Business partnerships often begin with trust and shared goals. But when a partner exits—whether due to death, disability, divorce or disagreement—a lack of planning can threaten the business. For small and mid-size business owners, a buy-sell agreement offers essential protection. Here’s a closer look at what it is, when to do this and its benefits to your business.
What is a buy-sell agreement?
Think of a buy-sell agreement as your business’s emergency plan. It outlines how ownership changes will occur in response to major events. This agreement creates a binding contract that tells you what to do if a partner leaves the business, dies or retires. It answers key questions:
- Who can buy the departing partner’s share?
- How do you determine the price?
- When must the purchase take place?
If you skip this step, you risk putting your business in the wrong hands. You also increase the chance of a lengthy and costly dispute.
Common triggering events
Unexpected events can shake even strong partnerships. If you plan for them now, you avoid surprises later. A solid agreement lists the events that trigger a buyout. These usually include:
- Death
- Permanent disability
- Divorce
- Bankruptcy
- Voluntary or forced exit
For example, what happens if a partner divorces? Do you want their former spouse to hold shares in the company? If a partner becomes permanently disabled, how long must that last before a buyout starts? Clear answers prevent confusion during stressful times.
How to structure pricing and valuation
The buyout price can make or break the deal. Some partners set a fixed price and update it yearly. Others use formulas based on earnings before interest, taxes, depreciation and amortization (EBITDA) or book value. Some bring in a third-party appraiser.
Each method has pros and cons. But you need a fair and consistent approach. If you skip this step, your buyout could stall or lead to conflict.
Protect your business now
Buy-sell agreements do not just handle exits. They also keep your business stable and your partnerships strong.
They show you have planned. They protect your family. They support long-term success.
If you don’t have an agreement or haven’t reviewed yours in years, now is the time to do so. A skilled attorney may work with you to develop a buy-sell plan that suits your ownership structure and industry. It is easier to do this before a crisis hits.