What Is A Cross-Purchase Buy-Sell Agreement? (2026)

How a Cross-Purchase Agreement Works

Many small businesses have buy-sell agreements in place. These agreements prohibit owners from selling shares to anyone but the other owners or the business itself.

A cross-purchase buy-sell agreement is a type of buy-sell agreement that requires the other owners to purchase their shares if one owner leaves the company.

A cross-purchase buy-sell agreement is a useful thing to have, but it’s not the only formal agreement your business should have. In some cases, you may need to create a general partnership agreement or another form of business contract in addition to your cross-purchase agreement.

When to Use This Type of Agreement

Do you need to create a cross-purchase buy-sell agreement? A cross-purchase buy-sell agreement isn’t right for every single business, but these are some circumstances where it may work well:

• Your company has 2-5 owners.
• You’d prefer to keep ownership of your business within the current group.
• You want to be prepared if one of the owners dies, suffers a disability, or otherwise leaves the company.
• You have a clear plan for how a departing owner’s shares will be purchased.

By having a clear agreement in place, you can reduce headaches and provide clarity to everyone involved in the contract.

Key Benefits for Business Owners

Cross-purchase buy-sell agreements have several benefits for business owners:

• New owners get a stepped-up cost basis, which can lower capital gains taxes later.
• They ensure the original ownership group maintains control.
• If shares are bought with life insurance proceeds, those proceeds are not subject to tax.

Cross-purchase buy-sell agreements also avoid the complex tax ramifications of stock redemption agreements.

Essential Terms to Include in the Contract

A cross-purchase buy-sell agreement should include the following:

• Company details and the ownership breakdown
• Rules of when ownership can change
• What circumstances (like death, retirement, disability, etc.) are covered
• How the share price is determined
• How the purchase will be funded

You should also include a clear procedure for how disputes will be handled.

Funding the Buyout With Insurance

Many business owners purchase life insurance policies on their partners. When a partner dies, the proceeds from the policy may be used to buy out their shares.

If a partner leaves the company before they die, their life insurance policy could still be useful. These policies accumulate value over time, and that value may be used to buy out an owner’s share when they leave.

The Importance of the Right Agreement

If you run a business with multiple partners, a cross-purchase buy-sell agreement is crucial. It allows you to keep ownership shares within the company and avoid bringing in outsiders.

However, if your agreement isn’t clear and legally sound, it can lead to significant issues later on. ConsumerShield makes it easy to create a solid cross-purchase buy-sell agreement. Take a look at our library of legal document templates and guides today.