In closely held businesses—whether family-owned or operated by multiple partners—the question of what happens when an owner dies, becomes disabled, retires, or wants to exit is not hypothetical, it is inevitable.
Yet, many business owners delay addressing these scenarios, assuming family or partners will simply “figure it out.” Without a written, enforceable buy-sell agreement, the result is often confusion, disputes, and even business failure.
The information below outlines what a buy-sell agreement is, why it’s essential, and the serious legal and financial risks business owners face when they fail to put one in place.
What is a Buy-Sell Agreement?
A buy-sell agreement (also known as a business continuity or business succession agreement) is a legally binding contract that outlines what happens to an owner’s share of the business when certain triggering events occur, such as:
- Death
- Disability
- Divorce
- Retirement
- Voluntary exit or sale
- Bankruptcy
- Dispute between owners
The agreement sets forth who can buy the interest, how the value will be determined, and how the transaction will be funded.
It functions much like a prenuptial agreement for business ownership, protecting all parties and preserving the long-term health of the enterprise.
Key Components of a Buy-Sell Agreement
A well-drafted agreement typically addresses the following:
Triggering Events
Defines the specific events that activate the buy-sell terms.
Permitted Buyers
Identifies who may (or must) buy the departing owner’s interest—co-owners, the company itself, or a third party.
Valuation Method
Establishes how the business or ownership interest will be valued (e.g., fixed formula, appraisal, or market-based method).
Funding Mechanism
Outlines how the purchase will be financed—often through life insurance, disability buyout insurance, or structured payments.
Restrictions on Transfer
Prevents unwanted or outside parties from acquiring ownership (e.g., a spouse in a divorce or an heir unfamiliar with the business).
Why Buy-Sell Agreements Are Especially Important for Family Businesses
In family businesses, emotions and relationships can complicate ownership transitions. Buy-sell agreements help mitigate:
- Sibling rivalries
- Unequal involvement in the business
- Conflicts between active and non-active family members
- Pressure to sell to outsiders
- Litigation between family members
These agreements remove ambiguity and reduce the chances of family disputes derailing both the business and personal relationships.
Pitfalls of Not Having a Buy-Sell Agreement
Failure to implement a buy-sell agreement can lead to a wide range of legal, financial, and interpersonal issues. Common risks include:
Unintended Co-Owners
Without an agreement, a deceased owner’s shares may pass to a spouse, children, or other heirs—regardless of whether they are involved or knowledgeable about the business. This can lead to dysfunction or forced buyouts under unfavorable terms.
Disputes Over Valuation
In the absence of a pre-agreed valuation method, disputes often arise over what the business is worth. This can delay transitions, lead to litigation, or result in forced liquidation.
Lack of Liquidity
Surviving owners may be unable to buy out a departing owner’s interest without access to funding, especially in the case of sudden death or disability. This can threaten the financial health of both the business and the family.
Business Disruption
Disagreements or legal battles over ownership can distract from operations, erode employee confidence, and damage the business’s reputation.
Uncertainty in Leadership
If ownership is transferred without a succession or transition plan, the business may suffer from a lack of clear leadership or decision-making authority.
Loss of Control
An exiting owner could sell their interest to a third party, including a competitor or outsider, without consent—undermining the company’s vision, culture, and strategic direction.
How Your Law Firm Can Help
At Oberman Law Firm, we assist business owners in drafting customized, enforceable buy-sell agreements tailored to the unique structure and goals of their business. Whether you operate a family business, a professional partnership, or a multi-owner enterprise, we help ensure that:
- Ownership transitions are predictable and peaceful
- Stakeholders are protected
- The business remains stable and operational during life’s unexpected events
Conclusion: A Simple Document with Powerful Protection
A buy-sell agreement may not be the most glamorous part of business planning—but it is among the most critical. Without one, the future of your business is uncertain. With one, you gain peace of mind, clarity, and control.
Don’t leave your legacy—and your business partners or family—vulnerable to risk or conflict.
About Us
Oberman Law Firm represents clients in a wide range of practice areas, including private equity, M&A, healthcare, corporate transactions, intellectual property, data privacy and security, regulatory compliance and governance, cross-border transactions, labor and employment, construction law, litigation, private clients’ services, corporate restructuring, and white-collar and governmental disputes.
As a firm, we offer the highest quality legal advice coupled with extraordinary and tailored service to deliver exceptional results to our clients. Our philosophy is to invest deeply in the brightest legal talent and build dynamic teams that operate at the pinnacle of respective practice areas. We believe in empowering our attorneys, encouraging entrepreneurialism, operating ethically and with integrity, and collaborating to bring the very best to every client engagement. These principles have guided us in building extraordinary and successful long-term partnerships with our clients.
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