I’ve been fortunate to own businesses for many years. I remember each stage–launching, building, and now overseeing the up-and-coming generation. For many of those years, our focus was entirely on the business—how to grow it, who to hire, where to find your next client.
What most business owners don’t think about are the “hit-the-fan” scenarios. One of the biggest nightmares? Not having an agreement in place with your business partner about what happens if one of you becomes disabled or passes away.
You must have a legal agreement—not just a handshake deal. A written agreement should outline exactly what happens if one partner is unable to work for an extended period or, in the worst case, passes away. This is called a buy-sell agreement or a redemption agreement.
Today, we’re going to look specifically at how this should play out for companies with more than one owner.
The Key Elements of a Buy-Sell Agreement
One of the most important aspects of this agreement is the valuation of the business. What is it worth? In the early days, you might think, “Well, without me, the business isn’t worth anything meaningful.” But that’s rarely true. Your business likely has value—especially to your surviving business partner.
And the last thing your surviving partner wants? Suddenly being in business with an uninvolved spouse—or worse, the deceased partner’s extended family, like siblings or parents. Without a written agreement, that’s exactly what can happen.
The deceased partner’s ownership stake passes to whoever is named in their will (or, if there’s no will, whoever the law designates). That’s definitely not the partner you originally chose.
How Will the Buyout Be Funded?
Your agreement also needs to specify how the buyout will be handled. If the business is worth $1 million and each partner owns 50%, that means a $500,000 payout to the deceased partner’s heirs or to your disabled partner. But can the business afford that?
Losing a partner is already a major blow. If the company suddenly has to come up with a large sum of money on top of hiring a replacement co-leader, that could threaten its survival. The worst-case scenario? The business dies soon after one of its founding partners dies.
A well-structured buy-sell agreement, often funded with life insurance, ensures that the surviving partner retains control while providing fair value to the deceased partner’s family—without putting the business itself at financial risk. Forecast the potential scenarios and decide how to structure your agreement.
Planning for these scenarios isn’t fun, but it’s necessary. If you’re in business with a partner, make sure you have a written agreement in place. It could be the difference between preserving the company you built—or watching it collapse under the weight of uncertainty.
