A buy-sell agreement is only as useful as the events it covers. If your agreement addresses death but ignores disability, divorce, or a partner’s bankruptcy, you have a plan with holes in it. And those holes tend to reveal themselves at the worst possible time.
The “triggers” in a buy-sell agreement are the specific events that activate the agreement’s purchase and sale provisions. Getting them right is what separates a document that protects your business from one that collects dust in a filing cabinet.
Why Trigger Events Matter
Every buy-sell agreement answers the same basic question: under what circumstances must (or may) an owner’s interest be purchased?
Without clearly defined triggers, two things happen.
- First, owners disagree about whether a particular event qualifies.
- Second, the agreement is unenforceable exactly when it is needed most.
The goal is to anticipate every realistic scenario that could disrupt ownership and make sure the agreement addresses it.
The Essential Trigger Events
Death of an owner.
This is the most universally included trigger, and for good reason. When an owner dies, their business interest becomes part of their estate.
Without a buy-sell agreement, the deceased owner’s heirs may inherit the interest and become your new business partner, which is rarely what anyone wants.
A death trigger ensures that the surviving owners can purchase the interest from the estate at a predetermined price, typically funded by life insurance.
Permanent disability.
If an owner becomes permanently unable to work, the business loses a contributor but retains a co-owner.
Without a disability trigger, the disabled owner continues to hold their interest (and potentially draw income) while the remaining owners absorb the additional workload.
The agreement should define “disability” clearly, specifying the duration of incapacity (such as 6 or 12 consecutive months), whether a medical certification is required, and what benefits the disabled owner receives during a waiting period.
Voluntary withdrawal or retirement.
Partners do not stay in business together forever. An owner who wants to retire or move on should have a clear path to exit, and the remaining owners should have the right to purchase that interest rather than having a new owner imposed on them.
The agreement should address how much notice is required, whether the departing owner can sell to an outside party, and whether the business or the remaining owners have a right of first refusal.
Involuntary termination.
In some business structures, an owner may also be an employee. If that owner is terminated for cause, the agreement should specify whether and how their ownership interest is affected.
This is especially important in professional practices and closely held corporations where active participation is expected.
Triggers That Are Often Overlooked
Divorce of an owner.
When a business owner gets divorced, their ownership interest may become a marital asset subject to division. If a court awards part of the business to the non-owner spouse, you could end up with an unwanted co-owner who has no connection to the business.
A divorce trigger gives the business or the remaining owners the right to purchase the divorcing owner’s interest (or the portion awarded to the ex-spouse) before it is transferred.
Bankruptcy or insolvency of an owner.
If an owner files for bankruptcy, their business interest becomes part of the bankruptcy estate.
A bankruptcy trustee could sell that interest to satisfy creditors, potentially bringing in a buyer who has no knowledge of or interest in the business. A bankruptcy trigger allows the remaining owners to purchase the interest before it reaches the open market.
Criminal conviction or loss of professional license.
For businesses that depend on professional licensing, such as law firms, medical practices, or financial advisory firms, the loss of a license effectively removes an owner’s ability to participate.
A criminal conviction can damage the business’s reputation. Both scenarios should be addressed as triggers.
Offer from an outside buyer.
If an owner receives an attractive offer from a third party, the agreement should give the business or the remaining owners a right of first refusal.
This ensures that no one can bring in an outside party without giving the existing owners an opportunity to match the offer.
Pledge or encumbrance of an ownership interest.
If an owner uses their business interest as collateral for a personal loan and then defaults, the lender could foreclose on that interest.
A trigger that prohibits pledging ownership interests without consent, and that activates a buyout if a foreclosure occurs, protects the business from involuntary transfers.
Mandatory vs. Optional Triggers
Not every trigger needs to force a sale. Some triggers are better structured as optional:
Mandatory triggers (the sale must happen):
- Death of an owner
- Permanent disability
- Bankruptcy or insolvency
- Loss of professional license
Optional triggers (the parties may choose to proceed):
- Retirement or voluntary withdrawal
- Divorce of an owner
- Outside offer to purchase
- Voluntary decision to exit the business
The distinction matters because mandatory triggers create certainty, while optional triggers preserve flexibility. Your agreement should use both, depending on the situation.
Coordinating Triggers with Your Estate Plan
Buy-sell triggers have direct estate planning implications:
- A death trigger funded by life insurance provides liquidity to your estate
- A disability trigger ensures your family receives fair value if you can no longer work
- A divorce trigger protects the business from being divided in a marital settlement
- A retirement trigger provides a clear exit path that your estate plan can account for
These provisions need to align with your will, your trust, your beneficiary designations, and your powers of attorney.
If your estate plan directs your business interest to your children but your buy-sell agreement requires a sale to your partner, those documents are working against each other.
Review and Update Regularly
Trigger events that made sense when the business was founded may not cover the risks the business faces today. The IRS expects buy-sell agreements to reflect current business value and current terms in order to be respected for estate tax purposes.
At minimum, review your triggers every two years, and immediately after any major event: a new partner, a significant change in value, a partner’s divorce, or a change in business structure.
At The Law Offices of Kimberly Butler Rainen, we draft and review buy-sell agreements for Massachusetts business owners and coordinate them with comprehensive estate plans. If your agreement is missing critical triggers, or if you do not have an agreement at all, the time to act is before the next triggering event occurs.