A buy-sell agreement decides in advance what happens to an owner’s stake when something changes: a death, a disability, a divorce, a departure, a dispute, or an offer from outside. It is the single most useful document a closely held company can have, and the one most often left until it is needed.
What it settles
Who may buy. The company, the remaining owners, or both in a stated order.
What triggers it. Death and disability are standard. Retirement, termination of employment, bankruptcy, divorce and an attempted transfer to an outsider are all common additions, and each can carry a different price.
How the price is set. A fixed figure updated annually, a formula, or an appraisal process. Each fails differently: fixed prices go stale, formulas misprice unusual years, appraisals are slow and expensive.
How it is paid. Rarely in one payment. A promissory note over several years, often with interest and security, is normal — and life insurance is the usual funding mechanism for the death trigger.
Where they go wrong
A price set in 2015 and never revisited. A formula that produces an absurd number after a bad year or an acquisition. No funding for the buyout, so the obligation exists and the money does not. And silence on the trigger that actually happens, which is usually a falling-out rather than a death.
Practical note
Review it when the business changes materially, not on a schedule. A new line of business, an outside investment, or a departure that the document did not contemplate are the moments the agreement either works or does not.