I tell business partners the same thing every time: the best time to sign a buy-sell agreement is when everyone still likes each other. Once a triggering event happens, whether that is death, disability, divorce, or a falling out, it is too late to negotiate fair terms. By then, everyone is protecting their own interest instead of the business.
A buy-sell agreement is one of the most important documents a partnership or multi-owner LLC can have, and it is one of the most commonly skipped.
1. What a buy-sell agreement actually does
A buy-sell agreement controls what happens to an owner's interest when certain events occur. It answers questions like: who can buy the interest, at what price or valuation method, and how will payment be structured.
Without one, you are relying on default state law and whatever goodwill exists between the remaining owners and the departing owner, or their heirs. That is a thin foundation for something this important.
2. Why death and disability are the events people forget
Owners often think of a buy-sell agreement as protection against a partner dispute. It is that, but it is also protection against ordinary life events. If a partner dies, do you want their spouse or children becoming your new business partner?
If a partner becomes permanently disabled and can no longer contribute, does the business have a clear mechanism to buy out their interest so the business can continue functioning? Without a plan, these situations can tie up a business for months or years.
3. Valuation terms prevent the biggest fights
The most common reason buy-sell agreements fail to prevent disputes is vague valuation language. "Fair market value" sounds reasonable until two sides hire two appraisers who reach two very different numbers.
A strong buy-sell agreement specifies exactly how value will be determined, whether through a set formula, a designated appraisal process, or an agreed method for updating a fixed price over time. It should also address how the buyout will be funded, since a lump-sum payment obligation can strain a business that is not prepared for it.
4. Funding the buyout matters as much as the price
Many buy-sell agreements are funded, at least partly, through life insurance policies on each owner. That way, if death is the triggering event, the funds to complete the buyout already exist rather than having to come out of the business's operating cash.
For disability, retirement, or voluntary exit, the agreement should set out a payment schedule that the business can realistically sustain without jeopardizing operations.
5. Review it as your business changes
A buy-sell agreement drafted when your business was two people and modest revenue may not reflect a company that has grown to five owners and significant value. I recommend revisiting these agreements whenever ownership changes or every few years as a matter of course.
An outdated buy-sell agreement can be almost as risky as having none at all, because everyone assumes it will work until the day they actually need it.
If your partnership does not have a buy-sell agreement, or yours has not been reviewed in years, let us get it in place while your relationships with your co-owners are still strong. Contact my Oklahoma City office or reach out through blgattorney.com to get started.