A buy-sell agreement is one of those documents that sits in a drawer until someone dies, becomes disabled, or wants out. When that day comes, a well-written buy-sell keeps the business running. A bad one, or no agreement at all, can tear it apart.
If you co-own a business in Massachusetts, here are three things to get right before you sign.
1. Agree on how the business will be valued
The most common fight in a buy-sell dispute is over price. One partner thinks the business is worth $2 million, the other thinks it’s worth $800,000, and now you’re in court.
Your buy-sell should spell out the valuation method in advance. Common approaches include:
- Fixed price, updated annually by the owners (simple, but often gets stale).
- Formula-based, tied to revenue, earnings, or book value (stays current, but may not capture intangible value).
- Independent appraisal at the time of the triggering event (most accurate, but slower and more expensive).
Pick one, write it down, and review it every year. A valuation that made sense five years ago may be wildly off today.
2. Fund it, don’t just sign it
A buy-sell agreement without funding is a promise nobody can keep. If your partner dies tomorrow and the agreement says you’ll buy their share for $1 million, where does that money come from?
The most common funding mechanism is life insurance. Each owner takes out a policy on the other (cross-purchase) or the business owns policies on each owner (entity-purchase). When a triggering event happens, the insurance proceeds provide the cash to complete the buyout.
Without funding, the surviving owners are left scrambling for a loan, draining the business, or negotiating with the deceased owner’s family under pressure. None of those outcomes are good.
3. Cover more than just death
Death gets the most attention, but it’s not the only event that can disrupt a partnership. Your buy-sell should also address:
- Disability. What happens if an owner can’t work for an extended period? Disability buyout insurance can fund this scenario.
- Voluntary departure. What if someone wants to leave? Define the notice period, the buyout terms, and whether the departing owner can compete.
- Divorce. In Massachusetts, business interests are marital property. A buy-sell can include provisions that prevent an ex-spouse from becoming your new business partner.
- Retirement. Set expectations for how and when an owner can transition out.
The more scenarios you address upfront, the fewer surprises you’ll face later.
Get it reviewed
If you already have a buy-sell, pull it out and read it. Is the valuation current? Is the funding in place? Does it cover disability and departure, or just death?
If you don’t have one yet, that’s the first conversation to have with your attorney and your financial advisor.
We help business owners in Massachusetts structure and fund buy-sell agreements that actually work when they’re needed. Book a free 30-minute conversation or call us at (774) 265-3963.