What Are The Different Types Of Buy-Sell Agreements? (2026)

What Is a Buy-Sell Agreement?

What is a buy-sell agreement? It’s often used in closely-held businesses to ensure ownership remains within a closed group. The agreement obligates an owner and their estate to sell their business interest to the remaining co-owners or the business entity when the owner exits the company.

Common Types of Buy-Sell Agreements

Most of the time, business owners creating buy-sell agreements choose one of the following:

• General buy-sell agreement
• Cross-purchase buy-sell agreement
• Redemption buy-sell agreement

Here’s a closer look at these types of buy-sell agreements and when you might use each one.

General Buy-Sell Agreement

General buy-sell agreements are sometimes called “business prenups.” They outline what will happen to an owner’s shares of the business if one of the following happens:

• Retirement
• Disability
• Death
• Divorce
• Resignation or any other departure from the company

Having an agreement in place helps ensure continuity after one partner leaves. It also stops a partner from buying or selling their shares to an outsider.

If you own a business with other people, creating a general buy-sell agreement can safeguard everyone’s business interests and peace of mind.

Cross-Purchase Buy-Sell Agreement

With this kind of buy-sell agreement, the other partners in the business purchase the departing partner’s shares. Notably, this kind of agreement can increase each remaining partner’s cost basis in the business, which decreases the future capital gains taxes they may owe.

Cross-purchase buy-sell agreements are usually funded by life insurance policies, so they tend to work best in companies owned by two or three people. If you think this might be the best buy-sell agreement for your company, you can create your cross-purchase buy-sell agreement in minutes online.

Redemption Buy-Sell Agreement

With a redemption buy-sell agreement, the business itself, rather than the individual partners in the business, buys the departing partner’s shares. The buyout is usually funded by a life insurance policy or the company’s own funds.

If a business has several co-owners, this might be a more feasible alternative to a cross-purchase buy-sell agreement. If you think it’s the right option, creating your own redemption buy-sell agreement is quick and easy.

What Kinds of Businesses Use Buy-Sell Agreements?

Examples of businesses that have buy-sell agreements include limited liability companies (LLCs), partnerships, and private corporations. Public corporations usually do not have buy-sell agreements, although they may accomplish similar aims with stock purchase agreements.

In some cases, the buy-sell terms may be built into the partnership or operating agreement. What is a partnership agreement or operating agreement? The co-owners enter into these types of agreements to govern their relationship with each other and the business.

Drawbacks to Buy-Sell Agreements

One drawback to a buy-sell contract is that it can limit a business owner’s flexibility. For example, they may wish to leave their share of a business to their child when they die. However, a buy-sell agreement may obligate the owner’s estate to sell the share to the remaining co-owners rather than passing it to the child in their will.

Another possible problem arises in setting the value of the departing owner’s share. Under the Internal Revenue Code, the agreement must generally use the company’s fair market value to set the sale price under federal tax laws.

However, this price will fluctuate, making it difficult for the business or the remaining co-owners to pin down at any particular moment.

Why Choosing the Right Buy-Sell Agreement Matters

Creating and maintaining a business comes with a lot more paperwork than many people realize. Establishing the right buy-sell agreement early on can help you and your partners avoid confusion and disputes if one of you leaves the company in the future.

When you take the time to understand buy-sell agreements and other essential legal forms, you can better protect your own interests as well as those of your business.

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