Why Every Business Partnership Needs a Buy-Sell Agreement

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You and your business partner have probably talked about growth plans, revenue targets, and client acquisition. But have you talked about what happens if one of you dies, becomes disabled, or decides to walk away?

If the answer is no, your business is operating without a safety net. A buy-sell agreement is the document that fills that gap, and without one, your family, your partner, and the business itself are all exposed.

What a Buy-Sell Agreement Actually Does

A buy-sell agreement is a legally binding contract between co-owners of a business that defines what happens to an owner’s interest when a triggering event occurs. It establishes who can buy the departing owner’s share, how the business is valued, and how the purchase is funded.

Think of it as a prenup for your business. It sets the rules in advance, while everyone is on good terms and thinking clearly, instead of leaving those decisions to a crisis, a courtroom, or state default law.

What Happens Without One

When a business owner dies without a buy-sell agreement, their ownership interest becomes part of their estate.

In Massachusetts, that interest will be distributed according to their will, or if there is no will, according to intestate succession law under M.G.L. c. 190B.

That can mean your business partner’s spouse, children, or other heirs suddenly hold an ownership stake in your company. They may have no interest in the business, no relevant experience, and no obligation to cooperate with you.

Alternatively, they may demand to be bought out immediately, at a price that has not been agreed upon, and at a time when the business may not have the cash to fund it.

For LLCs and partnerships, the consequences can be even more immediate. Depending on how your operating agreement or partnership agreement is structured, the death of a partner can trigger a dissolution of the business unless there is a mechanism to transfer or purchase the interest.

The Core Components of an Effective Buy-Sell Agreement

A well-drafted buy-sell agreement addresses five essential areas:

Triggering events. These are the circumstances that activate the agreement. The most common triggers include death, permanent disability, retirement, voluntary departure, divorce of an owner, bankruptcy of an owner, and loss of a professional license.
Who has the right or obligation to buy. The agreement specifies whether the remaining owners, the business itself, or both have the right or obligation to purchase the departing owner’s interest. This is the distinction between a cross-purchase agreement, an entity purchase (redemption) agreement, and a hybrid structure.
Valuation method. How is the ownership interest priced? The three most common approaches are an independent appraisal, a formula (such as a multiple of earnings or revenue), or a negotiated price that is updated periodically. An outdated valuation is one of the most common problems we see in existing agreements.
Funding mechanism. Where does the money come from? Life insurance is the most common funding tool for death-triggered buyouts. Disability insurance can fund buyouts triggered by incapacity. Without a funding mechanism, the agreement is just a promise on paper.
Payment terms. If the purchase is not funded by insurance, the agreement should specify the payment schedule, including down payment, installment terms, interest rate, and security for the remaining balance.

How a Buy-Sell Agreement Connects to Your Estate Plan

Your business interest is likely one of the most valuable assets in your estate. In Massachusetts, estates valued over $2 million are subject to the state estate tax, with rates up to 16%. The federal exemption for 2026 is $15 million per individual, but the Massachusetts threshold is significantly lower.

A buy-sell agreement serves your estate plan in several ways:

It creates liquidity. When a buy-sell is funded by life insurance, your estate receives cash instead of an illiquid business interest. That cash can pay estate taxes, cover debts, and provide for your family without forcing a fire sale.
It can establish value for estate tax purposes. The IRS recognizes buy-sell agreements as evidence of fair market value when certain requirements are met, which can reduce disputes with taxing authorities.
It protects your heirs. Your spouse or children should not have to negotiate with your business partner from a position of grief and vulnerability.

Types of Buy-Sell Structures

Cross-purchase agreement.

Each owner buys a life insurance policy on the other owners. When an owner dies, the surviving owners use the insurance proceeds to buy the deceased owner’s share directly from the estate. This works well for businesses with two or three owners but becomes complex with more.

Entity purchase (redemption) agreement.

The business itself purchases life insurance on each owner. When an owner dies, the business uses the proceeds to buy back the deceased owner’s interest. This is simpler to administer but can have different tax consequences than a cross-purchase.

Hybrid agreement.

The business has the first right to purchase the departing owner’s interest. If it does not exercise that right, the remaining owners can buy the interest individually. This provides the most flexibility.

Common Mistakes We See

No agreement at all. This is the most dangerous position. Without an agreement, you are at the mercy of state law, the probate court, and the other owner’s heirs.
Outdated valuations. An agreement that values the business at $500,000 when it is now worth $2 million creates a windfall for the buyer and a loss for the seller’s estate.
Insufficient funding. If the insurance coverage has not kept pace with the business value, the agreement may not be executable.
Failing to coordinate with estate documents. If your will leaves your business interest to your children but your buy-sell agreement requires a sale to your partner, those documents are in conflict. Your estate plan and your buy-sell agreement must work together.

When to Put a Buy-Sell Agreement in Place

The best time to create a buy-sell agreement is when the business is formed. The second-best time is now. You are overdue if any of these apply:

You have a business partner and no written agreement covering ownership transitions
Your existing agreement has not been reviewed in more than two years
The business has grown significantly since the agreement was last valued
An owner has gone through a divorce, had a health change, or is approaching retirement
You have added new partners or changed your business structure

At The Law Offices of Kimberly Butler Rainen, we help business owners across Massachusetts integrate buy-sell agreements into their broader estate plans. Your business is too valuable, and your family’s financial future is too important, to leave this to chance.