> ## Content Index
> Fetch the complete content index at: https://www.smdp.com/llms.txt
> Use this file to discover other available public pages before exploring further.

# Owners need to rethink plans for after demise
- URL: https://www.smdp.com/owners-need-to-rethink-plans-for-after-demise/
- Published: 2005-03-08T16:00:00.000Z
- Updated: 2026-10-24T23:34:37.000Z
- Author: David Pisarra
- Tags: Opinion, Santa Monica, #archive-import

*WHAT’S THE POINT?*

Most businesses which are owned as a sole proprietorship or as a partnership are the culmination of a lifetime’s work. The business owner has spent untold hours building something that is of great value.

Upon the death of the business owner there are many things which can happen, and they depend on the particular situation and how much planning has occurred prior. Many businesses either fail, or are sold at below market value, as a consequence of the business owner dying or becoming disabled. Even if a partner exists to continue the business there can still be many difficult problems.

An old partnership is much like a long-term marriage. After years of working together, a certain rhythm is created, the ebb and flow of business relations, the cycles of the particular business, the likes and dislikes of all the customers become known and familiar in a way that takes years to learn. When one partner dies, the other partner not only feels the personal loss, but can also be faced with the prospect of having to now deal with a grieving spouse or children who wish to come into the business having little or no knowledge of the way in which it was run.

Alternatively, the business owner may be a sole proprietor, who upon their passing, creates a leadership void in the business that quickly causes it to lose value. As it loses its value, the need for ongoing cash to continue operations increases. Thus, it creates a situation ripe for “fire sale” prices. This need will eventually destroy the business if it is not sold or managed properly.

Both of the above situations are regular occurrences and can be easily prevented with proper planning. Through the use of buy/sell agreements, life insurance policies and continuation programs, a business can be maintained so that the business owners’ heirs get the benefits of those years of hard work.

THE BUY/SELL AGREEMENT A buy/sell agreement is used mainly by partners in a business venture to prepare for the continuation of the business should one of the partners die or become incapacitated.

It is a legally binding agreement which provides that should one partner become incapable of performing the duties either through death or disability, he or she, or the heirs agree in advance to sell that interest in the business to the other partner(s) at an agreed upon amount or formula. This is very important in any business where there are partners.

It is much better to have a plan for the continuation of the business and the buying out of the other party’s interest than to leave it to the vagaries of the grieving parties.

This type of agreement is a complex contract that requires the participation not only of the partners, but in a community property state like California, should involve the non-participating spouses’ in order to maximize the agreement and minimize the litigation after the fact.

This type of agreement is usually crafted in conjunction with both life and disability policies in order to provide funds to the buying party and for the continuation of the business.

EMPLOYEE BUYOUT A buy/sell agreement also can be used by a sole proprietor who wishes to sell the business to a trusted employee as a reward for years of service or a group of employees who wish to take over when the original owner dies or becomes incapacitated.

A buy/sell agreement is nothing more than a contract between people which says that one party will sell when certain conditions occur and the other party will buy when those same conditions occur.

They can be structured in such a fashion as to be based on a set price, or an agreed upon formula, such as twice the average of the last three years' net profits. They can allow for the owner or heirs to carry back a loan to be paid over a period, or to allow for a single lump sum payment.

The benefit to the business owner is two fold: Firstly, he or she is establishing for the employee a perceived equity stake in the business — the fact that one day it will be theirs. Secondly, it is providing an additional source of income for the heirs. When set up as a one time payment of a set figure, which is then funded by a life insurance policy, the program works quite well.

Key person insurance is crucial if your business depends on you to be the rain-maker, or has a high flying salesperson who accounts for more than 30 percent of your sales. It is designed to be replacement income in the eventuality that you lose this person either to disability or death. If your business were to lose you, who could take over and what would be the losses? This policy is designed to provide the income that is needed to keep the lights on and the doors open while you recover or a replacement is found. Alternatively, if you or that top salesperson were to die, the policy would provide funds to maintain the business while it recovers from the loss.

No one likes to think about life after they are dead, or worse, if they are disabled. But the reality is that death comes at inconvenient times, and no one plans on getting a disability. A responsible owner will take the time, and face their fears to plan for the inevitable day when they are not in charge. (David Pisarra is a Business Development lawyer and partner in the Santa Monica law firm of Pisarra & Grist. He (310) 664- 9969 or by e-mail at )

*Originally published in the Santa Monica Daily Press print edition on March 8, 2005.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/030805.pdf?ref=smdp.com)