Buy-Sell Agreements Explained: Every Business Partner Should Have One

If you co-own a business, a buy-sell agreement may be the most important contract you don't have — yet.

A buy-sell agreement is a legally binding contract among business co-owners that governs what happens to an ownership interest when a triggering event occurs. Common triggering events include: death, disability, divorce, retirement, or one owner wanting to exit the business.

Without a buy-sell agreement, your co-owner's interest could end up in the hands of their spouse, their children, or their estate — leaving you in business with someone you never chose, who may have very different ideas about how the company should operate.

There are several common structures:

Cross-purchase agreement. Each owner agrees to purchase the other's interest in the event of a triggering event. Typically funded with life insurance policies on each partner.

Entity purchase (redemption) agreement. The business itself agrees to buy back the departing owner's interest. The entity owns life insurance on each owner and uses the proceeds to fund the buyout.

Hybrid agreement. Combines both approaches, giving the business and the remaining owners the flexibility to choose at the time of the triggering event.

Funding the agreement is critical. A buy-sell agreement without a funding mechanism is just a promise. Life insurance is the most common and cost-effective way to ensure the funds are available when needed.

Valuation is also key. How will the business be valued for purposes of the buyout? Options include fixed price, formula, or independent appraisal. The valuation method should be reviewed periodically to ensure it reflects current business value.

📌 If you have a business partner and no buy-sell agreement, you're taking on risk that could be easily avoided. Let's talk — schedule a consultation today.