How Buy-Sell Agreements Protect Your Business from the Unexpected

When times are good, few business partners want to imagine what could go wrong. But whether it’s death, disability, divorce, or simple disagreement, every business with more than one owner faces the possibility of a major disruption. Without a clear buy-sell agreement in place, those turning points can quickly spiral into costly legal disputes, strained relationships, and financial uncertainty.

The Risks of Avoiding a Buy-Sell Agreement

It’s common for owners to assume they’ll never need a formal agreement because their partnership feels strong. But real-world experience shows otherwise. Whether the business is between siblings, parent and child, or long-time colleagues, disagreements and unexpected life events happen. When there’s no documentation, each partner brings their own assumptions about what should happen next—and when that happens, attorneys usually benefit the most. Instead of a clear plan, companies often face expensive, time-consuming disputes that could have been avoided with a relatively small upfront investment.

 

Planning for Triggering Events

The strongest buy-sell agreements address the “four Ds”: Death, Disability, Divorce, and Disagreement. Each of these scenarios carries unique challenges. For example, key man life insurance can allow the company to buy out the shares of a deceased owner, but only if coverage is kept current as the company grows. Disability requires clarity on whether an owner can remain involved if they can no longer contribute in a meaningful way. Divorce may introduce state-specific complications, making spousal consent provisions critical to prevent unintended changes in ownership. And perhaps the most common trigger—disagreement—requires a clear process for determining value and ensuring that owners can separate fairly if visions for the business diverge.

Valuation: Getting to Fair

When partners part ways, the next big question is value. Some agreements use a formula-based approach, such as the Simple Numbers economic valuation. Others rely on third-party assessments of market value. Still others employ creative structures, such as the “smoking gun” clause, in which one partner makes an offer, and the other has the right to accept or counter by purchasing at that price. This simple mechanism encourages fairness and prevents lowball offers.

Regardless of the method chosen, valuation must balance fairness with financial reality. A payout that consumes more than 40 percent of company profits over the agreed period is often unsustainable and risks damaging the very business both parties worked to build.

Protecting the Company During a Payout

The ultimate purpose of a buy-sell agreement is not just to protect individual owners, but to safeguard the company itself. Remaining owners often rely on the business as their primary income-generating asset, and if a buyout structure places too much strain on cash flow, the company’s long-term viability is at risk.

That’s why most agreements spread payments over five to seven years, with terms flexible enough to allow for early payoff if performance exceeds expectations. In some cases, provisions can be added to ensure a departing owner shares in near-term growth or sale proceeds if the business is sold shortly after their exit. These structures create balance by honoring the departing owner’s contribution while ensuring the company remains strong enough to thrive.

Key Takeaways for Business Owners

 

Buy-sell agreements and valuations are often overlooked until it’s too late, but they are among the most important tools for protecting your business. By documenting expectations, addressing potential triggers, and structuring fair payouts, owners can avoid costly disputes and keep the focus where it belongs—on running and growing the business.

 

Learn More

Every ownership transition carries complexity, but with the right planning, it doesn’t have to become a crisis. To hear real-world stories and practical strategies for building buy-sell agreements that work, listen to the latest episode of Profitability Playbook: The Simple Numbers Podcast.

Visit SimpleNumbersCRI.com to explore additional resources and tools designed to help entrepreneurs protect their businesses and drive sustainable growth.