Buy Sell Agreements

What is a buy sell agreement?

A buy sell agreement is a written plan for what happens to a business when an owner leaves. It answers one question in advance: who buys the departing owner’s share, at what price, and with what money.

Without it, the answer is decided in a crisis, often by people who are grieving, in conflict, or under financial pressure. With it, the answer is decided calmly, in writing, while everyone is still at the table.

What happens without one?

• A deceased owner’s family may inherit a share of the business they cannot run and cannot sell.
• The remaining owners may have to find a large sum of money on short notice.
• A departing owner may sell to an outsider the other owners would never have chosen.
• A divorce or a disability can pull the business into a personal dispute.
• The business can stall while everyone argues about value.

What are the main types?

Cross purchase

Each owner agrees to buy the share of an owner who leaves. Life insurance is often owned by each owner on the lives of the other owners, so the money is there when it is needed.

Entity purchase

The business itself agrees to buy the share. The business owns life insurance on each owner, and the business uses the benefit to buy the share back.

Wait and see

A hybrid. The agreement lets the business buy first, and if it does not, the remaining owners buy. It keeps options open while still setting the rules in advance.

How is the buyout funded?

An agreement without funding is a promise without money. The most common funding sources are:

• Life insurance, so the money is there at death
• Disability insurance, so a buyout can happen if an owner can no longer work
• A payment plan from the business over time, which works only if the business can carry the payments
• Cash reserves, which few businesses hold in the amount a buyout requires

Life insurance is the most common funding tool because the need is largest at exactly the moment the business is least able to pay: the death of an owner.

How is the value set?

The agreement should say how the business is valued before anyone needs to know. Common methods include a fixed price reviewed each year, a formula based on earnings or revenue, or an independent appraisal. The method matters less than the fact that everyone agreed to it in advance.

What triggers a buy sell agreement?

A good agreement covers the events that actually happen:

• Death of an owner
• Disability that keeps an owner from working
• Retirement
• An owner who wants to sell and leave
• Divorce, so a share does not pass to a former spouse
• Bankruptcy or a creditor claim against an owner

What should you watch out for?

• The agreement must be funded. An unfunded agreement is a plan on paper only.
• The valuation method must be reviewed regularly. A price set five years ago may have nothing to do with the business today.
• Ownership changes need updates. A new partner or a partner who leaves changes the whole picture.
• The agreement should be written and reviewed by your attorney, with your CPA and your insurance professional at the table.

Common questions

We are friends and family. Do we really need this in writing?

Especially then. The closest relationships are the ones that suffer most when money and grief mix. Writing it down protects the relationship as much as the business.

How often should we review the agreement?

At least once a year, and every time ownership changes, the business grows sharply, or an owner goes through a major life event.

Can the agreement cover disability as well as death?

Yes, and it should. Disability is more common than death during working years, and a disabled owner who cannot work but still owns a share is a hard problem without a plan.

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Content on this page is for education only and does not constitute financial, tax, or legal advice. Please consult your tax advisor or attorney regarding your specific situation.