A buy-sell agreement is a legally binding contract that governs what happens to a business owner’s interest when a triggering event occurs — such as death, disability, retirement, or divorce. It is one of the most important documents a business partnership can have.

What Triggers a Buy-Sell Agreement?

Common triggering events include the death of a partner, permanent disability, retirement, voluntary departure, divorce, bankruptcy, or a partner’s desire to sell their interest. The agreement specifies exactly what happens in each scenario, preventing disputes and ensuring business continuity.

Types of Buy-Sell Agreements

The two most common types are cross-purchase agreements (where the remaining owners buy the departing owner’s interest) and entity-purchase agreements (where the business itself buys the interest). Each has different tax implications, and the right choice depends on your specific situation.

Funding Your Buy-Sell Agreement

A buy-sell agreement is only as good as the funding behind it. Life insurance is the most common funding mechanism for death-triggered buyouts, while disability insurance can fund disability-triggered buyouts. Without proper funding, the remaining partners may not have the cash to execute the buyout.