The Business Will: Buy-Sell Agreements & Succession
The Business Will: Buy-Sell Agreements & Succession
What happens if your business partner dies tomorrow? Why 50% of private companies collapse after a founder’s death, and how to structure a “Funded Buyout” to keep unwanted heirs out of the boardroom.
Executive Summary
- The Nightmare Scenario: You and Bob own a company 50/50. Bob dies. His shares go to his wife, who knows nothing about the business but now owns 50% of the vote. She demands high dividends, blocks investments, or tries to sell her shares to your competitor.
- The Solution (Buy-Sell Agreement): A binding contract that says: “If a partner dies, becomes disabled, or gets divorced, they (or their estate) MUST sell their shares back to the company/partners, and the company/partners MUST buy them.”
- The Funding Mechanism: A contract without cash is useless. The buyout is usually funded by Life Insurance.
👉 Bob dies ➔ Insurance pays $10M to You ➔ You pay $10M to Bob’s Wife ➔ You get 100% of the Company. Bob’s Wife gets cash. Everyone is safe.
Valuation: The “Formula” Rule
Stop Fixed Pricing: Never write a fixed price (e.g., “$5 Million”) in the contract. You will forget to update it, and 10 years later, the business will be worth $50M, leading to a massive lawsuit.
👉 Best Practice: Use a dynamic formula (e.g., “6x Trailing EBITDA” or “Average of two independent appraisals”). This ensures the price is always fair and current.
Mechanic: Cross-Purchase vs. Entity Redemption
Simulation: 2 Partners, $20M Company (Structure Comparison)
| Feature | Entity Redemption (Stock Buyback) | Cross-Purchase (Partner Buyout) |
|---|---|---|
| Who pays premiums? | The Company (Deductible? No) | The Partners (Personal $) |
| Tax Basis (Survivor) | No Increase | Full Step-Up |
| Best For | Many Partners (3+) | Few Partners (2-3) |
“A Buy-Sell Agreement is the firewall that keeps your partner’s personal tragedies (death, divorce, debt) from becoming your business catastrophes. Without it, you are in business with your partner’s lawyer or ex-spouse.”