Buy-Sell Agreements Explained: Why “We’ll Figure it out Later” Rarely Works

Most business partnerships begin with alignment and shared optimism. Founders are focused on growth, opportunity, and building something of lasting value. At that stage, discussing what happens if someone leaves can feel unnecessary and even uncomfortable.

As a result, the question of exit planning is often deferred.

“We trust each other.”“We’ll address that if it ever becomes an issue.”

Unfortunately, by the time it becomes an issue, it is usually too late to address it calmly or efficiently.

A properly structured buy-sell agreement is not a document that anticipates conflict–it is one that anticipates change, including major events in the lives of the founders.

What a Buy-Sell Agreement Is Designed to Do

At its core, a buy-sell agreement establishes a clear framework for what happens when an ownership interest must be transferred. That transfer may be triggered by retirement, disability, death, voluntary withdrawal, or a breakdown in the working relationship. Divorce and bankruptcy of a founder also affect ownership.

The agreement answers several fundamental questions:

• Who has the right to purchase the departing owner’s interest?

• How will the value of that interest be determined?

• What are the payment terms?

• How will the transaction be funded?

  
  

Without these answers in writing, transitions can quickly become contentious, disruptive, and financially destabilizing for the company.

Valuation: Resolve It While You Are Aligned

The most common source of dispute in ownership transitions is valuation.

When there is no agreed-upon method in place, one owner may believe the business is worth substantially more than another. Emotions, legacy considerations, and differing expectations often amplify the disagreement.

A well-drafted buy-sell agreement can establish:

• A defined valuation formula

• A requirement for periodic independent appraisals

• A mechanism for selecting a neutral valuation professional

• Clear terms for calculating and updating value

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These decisions are best made while relationships are stable. It is far easier to agree on valuation methodology when no one is actively exiting.

Funding the Buyout

Even where the mechanics of valuation are clear, many agreements fail because the funding mechanism was never considered.

If a partner passes away, does the company have liquidity to purchase the interest?

If a shareholder retires, can the remaining owners realistically meet a lump-sum obligation without impairing operations?

Common funding strategies include life insurance, disability insurance, structured installment payments, or sinking funds established over time. Addressing funding at the drafting stage ensures that the agreement can be executed when needed.

Protecting the Business from Unintended Ownership

In the absence of a buy-sell agreement, ownership interests may pass by operation of law to heirs or spouses who were never involved in the business. While that result may be legally valid, it can create operational and governance challenges.

A buy-sell agreement allows the remaining owners to maintain continuity and control by defining clear rights of first refusal or mandatory purchase provisions.

Planning for Continuity, Not Conflict

Some business owners resist formalizing exit provisions because it feels as though they are anticipating disagreement. In reality, the opposite is true.

A buy-sell agreement is a stabilizing document. It reduces ambiguity, preserves relationships, and protects the business from disruption during inherently emotional transitions.

It does not create conflict; it contains it and guides all owners through the disruption.

A Practical Reality

Every partnership agreement outlines how a business begins. Far fewer address how it continues when circumstances change.

If your current plan is to “figure it out later,” it is worth considering whether that uncertainty serves the company, your fellow owners, or your family.

A thoughtful buy-sell agreement allows you to address difficult questions at a time when you can answer them rationally and deliberately, rather than under pressure down the road.

If you would like to review your existing agreement or explore whether one is appropriate for your business, we are happy to discuss it with you.