A buy-sell agree­ment is like a pre-nuptial for your busi­ness. If you have a part­ner, then you should have one. If you’re on your own, own the busi­ness with your spouse, or plan on leav­ing the busi­ness to your chil­dren, then you prob­a­bly don’t need one.

Here’s how it works: All of the own­ers decide which events trig­ger a right or option to pur­chase each other’s inter­est in the busi­ness. The own­ers then decide how to deter­mine the price and pay­ment terms when that event is triggered.

So why should you do this? Let’s look at the Bea­t­les. Let’s say Ringo dies, divorces, is dis­abled, wants out, or any­thing else that changes own­er­ship in the band. If one of these events hap­pened the band might end up with a new drum­mer they don’t want. They can offer to buy Ringo’s inter­est in the band, but they might not have the money to do this. All of this can end up in some nasty and expen­sive disputes.

It’s best to avoid such dis­putes by decid­ing these issues when every­one is happy—during the hon­ey­moon period. That makes things much eas­ier, cre­ates a mar­ket for the busi­ness inter­est (because often it’s dif­fi­cult to sell less than 100% inter­est to an out­sider), and keeps own­er­ship sta­ble. Even the Bea­t­les split up.