A buy-sell agreement (also called a buyout agreement) is a contract among a co-owned business's owners that decides, in advance, what happens to an owner's share of the business if that owner dies, becomes disabled, divorces, goes bankrupt, retires, gets fired, or simply wants out. It names who is allowed to buy that share, sets (or sets a method for setting) the price, and lays out how the purchase will actually be paid for. Without one, a business can end up frozen — jointly owned by people who never intended to be in business together, like a deceased owner's spouse, an ex-spouse from a divorce, or an owner's bankruptcy trustee.
Why every co-owned business needs one
If you own a business with even one other person — a 50/50 LLC, a small corporation with three shareholders, a two-partner partnership — ownership interests do not just disappear when life happens to an owner. Absent a written agreement (or a default state-law rule filling the gap, which is rarely what anyone actually wants), an owner's interest typically passes to whoever inherits it, gets it in a divorce, or takes it through a bankruptcy or a creditor's judgment. That can leave the surviving or remaining owners running the business alongside:
A deceased owner's spouse or adult children, who may have no interest in or knowledge of the business but now hold a say in it (or a right to profits).
An ex-spouse who received the interest as part of a divorce property settlement.
A bankruptcy trustee or judgment creditor who now controls a former owner's stake.
A retired or disabled owner (or their family) who wants ongoing income from the business but is no longer contributing to it.
A former co-owner after a falling-out, who is now an unwilling business partner to people who no longer want to work with them.
A buy-sell agreement heads this off. It converts an uncertain, potentially contentious situation into a pre-agreed transaction: a triggering event happens, a buyer (or buyers) is already identified, a price or a way to calculate the price already exists, and — ideally — the money to pay for it is already lined up.
What a buy-sell agreement typically covers
The triggering events
A well-drafted agreement lists out the specific events that trigger a mandatory or optional buyout, commonly including:
Death of an owner
Permanent disability that prevents the owner from working
Divorce (so an ex-spouse cannot end up as a co-owner)
Bankruptcy or a creditor's judgment against an owner
Voluntary retirement or resignation
Termination of an owner-employee
An owner wanting to sell to an outsider (the agreement can give existing owners a right of first refusal)
A serious dispute or deadlock among the owners
Who can buy, and who must sell
The agreement specifies whether a triggering event creates a mandatory sale (the departing owner or their estate must sell, and the buyer must buy) or merely an option. It also specifies who the eligible buyer is — this is where the two basic structures come in.
The price or valuation method
This is often the most contested part if it isn't nailed down in advance. Common approaches include a fixed price the owners agree to revisit periodically, a formula (a multiple of revenue or earnings, or book value), or a requirement that the business be professionally appraised at the time of the triggering event, sometimes with each side naming an appraiser and the two appraisers naming a third if they disagree. A stale fixed price that nobody has updated in years is a common, avoidable problem — the agreement should say how and how often the price gets revisited.
How the buyout is funded
An agreement that sets a fair price but no way to pay it is not much protection. The most common funding tool for a death-triggered buyout is life insurance: the business or the owners carry life insurance policies on each owner, and the death benefit funds the purchase of the deceased owner's interest immediately, without draining the company's operating cash or forcing a fire sale of business assets. For disability, retirement, or a voluntary departure, funding is more often a promissory note with payments spread over time, sometimes combined with disability insurance. If life insurance is used, get advice from a licensed insurance professional and your tax advisor on how the policies are owned and structured — how a policy is set up can affect who receives the payout and how it is taxed, including special federal rules that can apply to a business-owned policy on an employee-owner's life.
Cross-purchase vs. entity-redemption: the two basic structures
At a high level, there are two ways to structure who does the buying:
Cross-purchase agreement. The remaining owners buy the departing owner's share directly, in proportion to their existing ownership (or however the agreement specifies). If life insurance funds it, each owner carries a policy on each of the other owners. This works cleanly with a small number of owners; it gets administratively heavier as the number of owners grows, since the number of policies needed multiplies quickly. One advantage often cited is that the buying owners' cost basis in the business can increase by what they pay, which may matter later if they sell.
Entity-redemption (stock-redemption) agreement. The business itself — not the individual owners — buys back the departing owner's share, using company funds or a company-owned insurance policy. This is simpler to administer, since the business needs only one policy per owner rather than a web of cross-owned policies, but it doesn't produce the same basis increase for the remaining owners. It can also carry estate-tax valuation consequences: under a 2024 U.S. Supreme Court decision (Connelly v. United States), company-owned life insurance used to redeem a deceased owner's shares can be counted toward the company's value for federal estate-tax purposes, without an offsetting reduction for the obligation to redeem. That is one more reason to design the structure with a CPA and attorney rather than assuming redemption is automatically the simpler or cheaper tax choice.
Some agreements use a hybrid ("wait-and-see") structure, giving the business the first option to redeem and the remaining owners a backup option to buy directly.
Which structure fits best depends on the number of owners, how the business is taxed, state law governing the entity, and each owner's individual tax situation — this is exactly the kind of decision to make with a business attorney and a CPA together, not on your own.
What to do
Put it in writing before you need it. The best time to agree on a price and a process is when everyone is getting along and no one knows who will be the one leaving first — not after a death, a divorce filing, or a falling-out, when interests diverge and trust may be gone.
Talk to a business attorney about drafting the agreement (or adding buy-sell provisions to your operating agreement, partnership agreement, or shareholder agreement) so it fits your entity type and your state's law.
Talk to a CPA about the tax consequences of the structure you choose, including how any life-insurance-funded buyout is taxed, before you sign anything.
Get a business valuation, or agree on a valuation method, and revisit it regularly. Calendar a review — annually or every few years — so the price mechanism doesn't go stale.
Line up funding — commonly life insurance for a death trigger, and a payment plan (with interest and security for the seller) for other triggers.
Coordinate the agreement with your estate plan and, if you're married, be aware of how it interacts with marital property and divorce law in your state, so the buy-sell agreement and your will or trust don't contradict each other.
Review the agreement whenever ownership changes — when a new partner joins, when the business's value changes significantly, or when an owner's personal circumstances change.
How this fits with growing or transitioning your business
A buy-sell agreement is closely related to bringing on a new owner and to planning who takes over the business eventually — it's worth thinking about all three together with your attorney rather than treating each as a separate, later problem. If a triggering event ultimately leads to a business closure or a bankruptcy filing instead of a buyout, the personal-liability and filing questions that raises are a separate topic; get advice from a bankruptcy attorney for that piece specifically.
Frequently asked questions
Do we need a buy-sell agreement if we're a small, informal LLC with just two members?
Especially then. Small, informal businesses are often the ones with no written plan for what happens if one owner dies or wants out, which is exactly when disputes get personal and expensive. Two-owner businesses are also the simplest and often cheapest to cover with a cross-purchase structure.
Can our operating agreement or partnership agreement just include buy-sell terms, or do we need a separate document?
Either can work. Some businesses build buyout provisions directly into their operating agreement, partnership agreement, or shareholders' agreement; others use a standalone buy-sell agreement that works alongside those documents. Your attorney can advise which fits your entity and your state's requirements better.
What happens if we never valued the business and an owner dies without a buy-sell agreement in place?
The remaining owners and the deceased owner's estate will typically need to negotiate a valuation and a sale (or the estate may simply become a co-owner) without any pre-agreed process, price, or funding — often during an already difficult time. This is the scenario a buy-sell agreement exists to prevent.
Is life insurance required to fund a buy-sell agreement?
No, but it's a common and popular choice for death-triggered buyouts because it provides cash exactly when it's needed without forcing the business to liquidate assets or take on debt. Other triggers, like retirement or a voluntary exit, are more often funded through an installment note.
How much does a buy-sell agreement cost to set up?
It varies with the complexity of your ownership structure, the valuation approach chosen, and your attorney's and CPA's fees — there's no fixed figure to quote. Ask for a fee estimate up front when you consult a business attorney.
This article is general information, not legal, tax, or financial advice, and does not create an attorney-client or accountant-client relationship. Talk with a qualified business attorney and a CPA about your specific ownership structure before signing a buy-sell agreement.
Frequently asked questions
Do we need a buy-sell agreement if we're a small, informal LLC with just two members?
Especially then. Small, informal businesses are often the ones with no written plan for what happens if one owner dies or wants out, which is exactly when disputes get personal and expensive. Two-owner businesses are also the simplest and often cheapest to cover with a cross-purchase structure.
Can our operating agreement or partnership agreement just include buy-sell terms, or do we need a separate document?
Either can work. Some businesses build buyout provisions directly into their operating agreement, partnership agreement, or shareholders' agreement; others use a standalone buy-sell agreement that works alongside those documents. Your attorney can advise which fits your entity and your state's requirements better.
What happens if we never valued the business and an owner dies without a buy-sell agreement in place?
The remaining owners and the deceased owner's estate will typically need to negotiate a valuation and a sale (or the estate may simply become a co-owner) without any pre-agreed process, price, or funding, often during an already difficult time. This is the scenario a buy-sell agreement exists to prevent.
Is life insurance required to fund a buy-sell agreement?
No, but it's a common and popular choice for death-triggered buyouts because it provides cash exactly when it's needed without forcing the business to liquidate assets or take on debt. Other triggers, like retirement or a voluntary exit, are more often funded through an installment note.
How much does a buy-sell agreement cost to set up?
It varies with the complexity of your ownership structure, the valuation approach chosen, and your attorney's and CPA's fees, so there's no fixed figure to quote. Ask for a fee estimate up front when you consult a business attorney.
This article is general legal information, not legal advice, and may not reflect the most current law or the law in your jurisdiction. Laws vary by state and change over time. For advice about your specific situation, consult a licensed attorney.
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