Buy-Sell Agreements & Insurance for Contractor Partnerships
Your partner dies. Your partner gets divorced. Your partner wants out. Without a buy-sell agreement, you're in trouble.
Two plumbers started their company 20 years ago. Revenue is $6M. Each owns 50%. Neither has a buy-sell agreement. One dies in a car accident on Tuesday.
What happens? The deceased partner's wife now owns 50% of the business. She doesn't know plumbing. She needs cash. She wants to sell. The surviving partner can't afford to buy her out. The business can't operate with the uncertainty. Everyone loses.
What a Buy-Sell Agreement Covers
Trigger events: Death, disability, voluntary exit, divorce, bankruptcy, retirement. Each event should have pre-agreed terms for the transfer of ownership.
Valuation: Fixed price (updated annually), formula-based (multiple of EBITDA, book value), or independent appraisal at time of trigger. Formula-based is most practical for contractors.
Funding: Life insurance (cross-purchase or entity-purchase), installment notes, sinking funds, or combination. Life insurance is the most common funding mechanism for death triggers.
Cross-Purchase vs. Entity Purchase
In a cross-purchase, each partner owns a policy on the other. When one dies, the survivor collects the proceeds and buys the deceased's shares. The survivor gets a stepped-up basis.
In an entity purchase (redemption), the company owns policies on all partners. When one dies, the company redeems the shares. Simpler with multiple partners, but no basis step-up for survivors.
For two-partner contractor businesses, cross-purchase is usually better. For three or more partners, entity purchase is simpler.
This pairs with exit planning and the full tax strategy guide.
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