How to Structure a Buy-Sell Agreement That Protects Your Legacy
Most business owners think about selling their company once. However - there are other instances that may not be top of mind... What happens if a partner passes away? What if someone wants out earlier than expected? What if you plan to transition the business to family over time?
That’s where a buy-sell agreement comes in. The buy-sell is not just for a single event, It is about preparing for all the potential disruptions that could affect your business, your family, and your legacy.
A well-designed buy-sell agreement creates clarity, avoids conflict, and ensures that your intentions are honored, whether you are around to enforce them or not.
The Basics:
What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract between business partners or shareholders that outlines what happens if one of them leaves, becomes disabled, passes away, or wants to sell their ownership interest.
This document can cover:
Who is allowed to buy the departing owner’s interest
How the business will be valued
What payment terms will apply
How insurance will be used to fund the agreement
Restrictions on selling to outside parties
Without one, the exit of a partner can lead to family disputes, forced sales, cash flow challenges, or worse... bringing in an unintended new owner with decision-making power.
Who Needs One?
Any business with multiple owners should have a buy-sell agreement in place, including:
Partnerships
Family-owned businesses with multiple generations involved
Closely held corporations with minority shareholders
Businesses with key executives who have equity stakes
Even if you are the majority owner, the absence of a buy-sell agreement can complicate succession planning and create tension between heirs, employees, or outside investors.
Key Elements of a Strong Agreement
A buy-sell agreement is only as effective as the details it covers. The most effective documents address the following:
1. Triggering Events
Define what scenarios initiate a buyout. These often include:
Death
Permanent disability
Voluntary retirement or resignation
Involuntary termination
Divorce or personal bankruptcy
Offers from outside buyers
Clarity here reduces the chance of future legal disputes.
2. Valuation Method
Set a clear, fair way to determine the value of the business interest. Options include:
Fixed price (updated annually)
Formula-based (EBITDA multiple, revenue benchmark, etc.)
Third-party valuation at time of trigger
Using a trusted valuation method avoids arguments during an emotional or time-sensitive event.
3. Funding the Buyout
The agreement should specify how the purchase will be funded. Common methods include:
Life insurance or disability insurance
Sinking fund or escrow account
Seller financing with promissory notes
Third-party financing if available
For death or disability, insurance is often the cleanest solution- but only if the policies are properly owned and maintained.
4. Payment Terms
Outline the structure and timeline of the buyout. Will it be a lump sum? A multi-year payout? Will there be interest? These terms affect the company’s cash flow and the seller’s tax situation.
5. Transfer Restrictions
Most buy-sell agreements include language that prevents owners from selling their interest to outside parties without first offering it to the company or existing partners.
This protects the ownership structure and ensures long-term alignment.
Family-Owned Businesses Need Extra Care
In family businesses, ownership is often more than financial. It reflects legacy, identity, and history. A buy-sell agreement helps separate emotional decisions from operational ones.
It can outline how shares pass to children or trusts
It can protect siblings or in-laws from becoming forced partners
It can be coordinated with your estate plan to reduce tax and conflict
These conversations are not always easy. But they are much easier before a crisis arises.
Why It Matters for Your Legacy
A buy-sell agreement is not just a legal document. It is a tool for protecting your life’s work. It ensures that:
Your family is paid fairly and promptly if something happens to you
Your partners are not left scrambling to cover the loss
Your company continues to operate smoothly during transitions
Your exit, retirement, or succession plan is implemented on your terms
We often say that legacy is not just what you leave behind. It is what continues to function well after you are gone. A good buy-sell agreement helps make that happen.
It Is Never Too Early to Put One in Place
The best time to draft or update your buy-sell agreement is now- before anyone is sick, tired, angry, or gone.
We help business owners review, revise, and coordinate these agreements with their broader financial and estate plans. Whether you are starting from scratch or dusting off a 15-year-old document, we can help.
Schedule a call with us to review your current structure and make sure it still supports your vision, values, and relationships.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should consult with their qualified legal, tax, and accounting advisors before implementing any strategy discussed herein. CRN202809-9715406.