What happens to my share of the business if I die?

Whatever the operating agreement says, and if it says nothing, your co-owners may find themselves in business with your family.

Whatever the operating agreement says. Not whatever your estate plan says — and when the two disagree, the agreement usually wins, because your co-owners are parties to it and your beneficiaries are not.

If the agreement says nothing, the answer is that your interest passes to whoever your plan names. Your co-owners are then in business with your spouse or your children, who did not choose them, do not work there, and cannot sell to anyone because nobody buys a minority stake in a private company from a grieving family.

That outcome serves nobody. A buy-sell agreement is how it is avoided.

What a buy-sell actually decides

Five questions, and an agreement that leaves any of them open has not finished the job.

• On what event? Death is the obvious one. Disability, retirement, divorce, bankruptcy and departure all deserve their own treatment.
• Who may buy, and who must sell? An option to buy and an obligation to sell are different instruments with very different outcomes.
• At what price? See below. This is the one.
• With what money? An obligation to buy without a funding source is a promise the surviving owners may not be able to keep.
• On what terms? Lump sum, or paid over years with interest.

Cross-purchase or redemption

In a cross-purchase the surviving owners buy the departing interest personally. In a redemption the company buys it back. The choice affects tax basis, how insurance is owned, and what happens when there are more than two owners — and it is worth deciding deliberately rather than inheriting from a template.

Funding it

Life insurance is the usual answer for the death trigger, and it is the reason a buy-sell works at all: the money arrives at the same moment the obligation does. Whether the company or the individual owners hold the policies follows from the structure above, and getting that backwards is a common and correctable error.

The provision most often left blank

How the price is arrived at. An agreement that says the owners will agree a value at the time means, in practice, that a grieving family and the surviving owners will negotiate under the worst possible conditions. Write the method down now, while everyone is still friendly and nobody knows which side of the transaction they will be on.