Buy-Sell Agreements

Why Every Multi-Owner Business Needs a Buy-Sell Agreement

Business owners almost always plan for growth, but almost never plan for the day an owner dies, becomes disabled, gets divorced, retires, or simply decides they’ve had enough. And yet those are the moments when a closely held business is at the highest risk of losing substantial value, if not the risk of complete collapse.

A Buy-Sell Agreement is the tool that keeps the business alive when life gets unpredictable. It is the roadmap for what happens to an owner’s share when the unexpected occurs. Without one, even a well-run business can find itself in chaos, tied up in court, or suddenly co-owned by people who have no business running it.

What a Buy-Sell Agreement Really Does

A Buy-Sell Agreement answers one essential question:

“If something happens to one owner, who ends up owning their interest, and how?”

The Buy-Sell protects the company from being forced into business with:

• A former partner’s spouse
• A child who has zero interest in the company
• A creditor, bankruptcy trustee, or judgment holder
• A disgruntled or inactive owner
• Someone who inherits ownership through probate
• A divorcing spouse entitled to marital assets

Instead of chaos, the Buy-Sell creates an orderly, predictable transfer. Owners know what will happen, families know what to expect, and the business keeps moving.

Triggering Events: The Life Moments No One Wants to Think About

A well-drafted Buy-Sell Agreement covers the major events that disrupt ownership:

1.Death of an Owner

Who buys the deceased owner’s interest? The company? The remaining owners? A key employee? Is the purchase funded by life insurance? The Buy-Sell answers these questions, so the business doesn’t freeze while the estate is being probated.

2. Disability

Permanent disability is far more common than early death. A Buy-Sell defines disability, sets a timeline, and explains how ownership is transferred if the owner can no longer participate.

3. Retirement or Voluntary Exit

What’s the exit plan for an owner who wants to step away? Without rules, one partner may feel trapped while another wants out. The Buy-Sell gives everyone a clear path.

4. Divorce

Michigan courts can award a business interest to a spouse in a divorce. A Buy-Sell prevents a situation where a partner’s ex-spouse suddenly becomes a co-owner.

5. Bankruptcy or Creditor Problems

If an owner has financial trouble, their creditor may try to seize their business interest. A Buy-Sell protects the company by requiring the interest to be sold back before outsiders gain control.

6. Deadlock or Misconduct

Sometimes an owner becomes disruptive, unproductive, or impossible to work with. A Buy-Sell can create a forced buyout mechanism to protect the company.

Pricing the Business: The Hardest Part of the Agreement

Figuring out the value of the business at the time of a triggering event is often the most contentious part of a Buy-Sell. A good agreement avoids arguments by defining the valuation method in advance.

Common methods include:

• Independent appraisal
• Agreed-upon formula (revenue multiple, EBITDA multiple, capitalization rate)
• Book value or adjusted book value
• Hybrid methods

Each method has tax and fairness implications. A Buy-Sell lets the owners choose the approach that fits their industry, size, and long-term goals.

Paying for the Buyout

Even if the business is willing to buy an owner’s interest, the money has to come from somewhere. There are several options:

• Life insurance (most common for death events)
• Disability buyout insurance
• Company cash flow
• Promissory notes with installment payments
• Sinking funds set aside annually

Insurance-backed Buy-Sells are particularly powerful because they provide immediate liquidity when it’s needed most and prevent the surviving owners from being forced into expensive loans or emergency capital calls.

Coordinating With Estate Planning

When a Buy-Sell Agreement is properly coordinated with your estate plan:

• Your estate gets a fair, predetermined price for the business
• The ownership is kept away from unintended heirs
• Your family will avoid probate
• There will be no messy fight among your children over business control
• You will rest assured your children are treated fairly

This is especially important when only one child will eventually inherit the business, and the others will receive non-business assets. The Buy-Sell provides structure, clarity, and fairness.

Why “Handshake” Agreements and Templates Fail

Many business partners trust each other implicitly, until something goes wrong.

Common disasters include:

• Owners disagreeing on the value of the business after a death
• Partners arguing over whether disability has occurred
• A divorcing spouse demanding ownership
• Children inheriting voting rights and deadlocking the business
• Creditors attempting to seize a partner’s interest
• Surviving owners unable to afford a buyout
• A disgruntled inactive owner blocking decisions

These situations can destroy years of hard work. A templated or poorly drafted Buy-Sell will not hold up under pressure or Michigan’s tax and corporate laws.

The Bottom Line

A Buy-Sell Agreement is not just a legal document, it’s a stability plan for your company’s future. It protects the business from disruption, protects families from conflict, and protects owners from being stuck with partners they never chose.

Every multi-owner business should have one, and every existing Buy-Sell should be reviewed regularly to ensure it reflects current ownership, valuation, tax laws, and family dynamics.

A business without a Buy-Sell Agreement is not truly protected, it’s vulnerable.