What Is A Buy-Sell Agreement And When Do You Need It? (2026)
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Reviewed By Adam Ramirez, J.D.
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Summary
- An advance directive outlines your wishes for future healthcare
- It can guide decision-making if you become incapacitated
- You can usually choose someone to make healthcare decisions on your behalf
When you own a business, it’s important to be prepared. With a buy-sell agreement, you’ll be better able to handle the aftermath if a partner suddenly leaves the company. But what is a buy-sell agreement, and why is it important for your company to have one?
Understanding a Buy-Sell Agreement
A buy-sell agreement is an agreement created by partners in a closely held business. It specifies how a partner’s interest in the business will be sold or transferred if that partner dies, retires, becomes disabled or otherwise leaves the company.
Types of Buy-Sell Agreements
There are three main types of buy-sell agreements companies use:
- General Buy-Sell Agreement: A general buy-sell agreement determines how a partner’s shares will be handled. Some include elements of both cross-purchase and redemption buy-sell agreements. You can create a general buy-sell agreement quickly online.
- Cross-Purchase Buy-Sell Agreement: This kind of agreement allows remaining partners, rather than the company itself, to purchase a departing partner’s shares. Create a customized cross-purchase buy-sell agreement in minutes.
- Redemption Buy-Sell Agreement: With a redemption buy-sell agreement, the business directly purchases a departing partner’s business interests. Take a moment to create a redemption buy-sell agreement for your company.
When creating a buy-sell agreement, all business partners should discuss their needs and goals. It’s a good idea to enlist the help of a business attorney, too.
Benefits for Business Owners and Their Heirs
You might wonder: What is a buy-sell agreement for? Creating your agreement can take some time, but it comes with several benefits for you and your heirs, including:
- Your business can continue without interruption after a partner leaves.
- Heirs can receive quick, usable compensation.
- Remaining partners still have control over company ownership.
A complete buy-sell agreement also establishes a procedure for determining the company’s valuation. That way, partners and heirs can avoid conflict over the company’s exact value.
Funding Options: Life Insurance vs. Alternatives
In many cases, buy-sell agreements are funded by life insurance policies. With cross-purchase agreements, partners have life insurance policies on each other. For redemption agreements, the business holds life insurance policies.
However, this isn’t the only way to fund a buy-sell agreement. Sometimes, the business uses a sinking fund or takes out a bank loan to purchase the shares.
Key Considerations When Setting Up the Agreement
When creating a buy-sell agreement, you and your business partners should consider the following:
- What events trigger the agreement?
- How will the business be valued?
- How will share purchases be funded?
- Will the business, individual partners or both purchase the shares?
Once you’ve created the policy, you and your business partners should regularly review it to make sure it still fits your needs.
What Is a Buy-Sell Agreement’s Protection Worth?
If you’ve started a company with friends or acquaintances, it’s easy to think that you won’t need to create a buy-sell agreement. However, things don’t always go as planned.
When you take the time to select and create the right buy-sell agreement, you can protect yourself, your business partners and your heirs from unforeseen consequences. The protection of such a document can be invaluable.
Browse legal document templates and guides from ConsumerShield to find the right forms for your needs today.
