Business owners are builders. They spend their lives building a business that provides goods and services to their clients and provides themselves a living. But nothing can tear down that lifetime work faster than their own death, or the death of a business partner. Often, much of the value of a business dies with the owner.

Each business encounters different problems. The questions facing a sole proprietor are two-fold. First, if he or she dies, how can the heirs continue the business or keep from selling the business at fire sale prices? The executor of the estate can continue the business, but must find someone willing to run it. They can sell the business, if the heirs wish, but must find a buyer. This is made harder by the fact that any potential buyers will be in a better negotiating position, knowing the business is becoming less valuable with each passing day following the owner's death. Also, the heirs may be in disagreement over what to do with the business. Some may want to keep the business, while others want to cash out. If the business is kept running by some heirs, those wanting out would need to be compensated. If the cash to do this can't be found, this could potentially force a liquidation of the business.

The second question facing a sole proprietor is this - how does the business owner keep key employees confident that the business, and their jobs, will survive after his or her death?

If a partner dies, the surviving partner can be left with uncertainty. First, they may find themselves in business with the deceased partner's heirs - who may have different goals for the company. If the heirs wish to sell to the surviving partner, can they be paid? And will the cash needed to buy the business be on hand?

These questions can throw the value and continuation of a business into doubt. This could make creditors more likely to call loans, and key employees less likely to stay with the firm.

Buy-sell agreements are designed to answer these questions and work toward eliminating these problems.2

Basically a deal struck by interested parties in the firm to sell their share of the business to another person if one should die, these agreements are often funded by life insurance. Owners take out a life insurance policy on themselves with a key person as the beneficiary. If the owner passes away, the key person can use the proceeds to buy the business from heirs. This way, the key person continues to work and operate the business. That same key person will have the funds to purchase the business, and the heirs would receive a fair price (agreed to before the owner's death). They also get an easy liquidation of the estate.1

The business owner also benefits from the arrangement. They have the satisfaction of knowing the business will continue after their death, and that their regular employees will continue to have stable employment. In addition, the business owner may find greater productivity and loyalty from key employees, who may be aware that ownership is in their future.2

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