Buy-Sell Agreement Definition, Types, Key Considerations

Put simply, a buy-sell agreement is a legally binding contract among business co-owners that governs how ownership interests are transferred if specific events occur. This is also sometimes described as a “business will.” This accord ensures that succession and ownership continuity are addressed long before unexpected circumstances arise. Above all else, its purpose is to provide clarity, prevent disputes, and protect both the company and the individuals involved. 

For entrepreneurs, high-net-worth individuals, and international investors, a well-drafted buy-sell agreement is a vital tool for maintaining long-term stability and safeguarding enterprise value. Because laws, business types, and industry practices vary across jurisdictions, each accord must be carefully adapted to fit the structure and goals of the business.

We’ve put together this article to provide entrepreneurs and business leaders alike practical insights into these agreements and how they function. 

What Is a Buy-Sell Agreement?

A buy-sell agreement formally sets out in writing how ownership interests in a company will be transferred under certain circumstances. It behaves a lot like a will in personal estate planning, as the accord provides a clear framework to manage transitions smoothly and without unnecessary conflict. 

Common triggers for activating these accords include:

• Death or disability of a co-owner
• Retirement of a co-owner
• Voluntary exits of a co-owner
• Irreconcilable disputes between co-owners

By detailing procedures in advance, the accord reduces uncertainty and minimizes the risk of litigation among surviving owners, heirs, or other stakeholders. The central aim is to ensure continuity by protecting the ongoing business while safeguarding the financial and legal interests of everyone involved.

Why Buy-Sell Agreements Matter

The importance of a buy-sell agreement lies in its ability to preserve business operations when ownership changes unexpectedly. Without one, disputes can emerge over who has the right to acquire ownership interests or how they should be valued. This uncertainty may strain relationships among co-owners, create instability for employees, or even threaten the company’s reputation with clients and investors. 

Beyond conflict prevention, these agreements protect family members and heirs who may inherit ownership stakes but lack the knowledge or desire to participate in management. By clarifying valuation methods, funding strategies, and transfer mechanisms, a buy-sell agreement reduces ambiguity and enhances trust.

Essentially, these accords provide a clear roadmap that balances the needs of the business, its owners, and external stakeholders.

Types of Buy-Sell Agreements

There are three primary types of buy-sell agreements, each suited to different ownership structures and objectives.

Cross-Purchase Agreement

In a cross-purchase situation, the remaining owners agree to purchase the departing owner’s shares directly. This model works well in businesses with a small number of co-owners, as it keeps transactions personal and straightforward. Each owner typically holds insurance policies on the others to fund potential buyouts, which ensures liquidity when needed. 

While this tends to be effective for smaller enterprises, cross-purchase agreements can become cumbersome if ownership expands.

Redemption Agreement

A redemption agreement shifts the responsibility from individual owners to the business entity itself. In these cases, the company repurchases the departing owner’s shares, centralizing the process and reducing the burden on remaining co-owners. 

This structure is common among corporations and limited liability companies (LLCs), where the entity has its own resources and legal identity. Redemption agreements simplify management but can impact company finances if reserves are insufficient.

Hybrid Agreement

The hybrid model combines aspects of both cross-purchase and redemption agreements, offering flexibility based on circumstances. For instance, the company may have the first right to redeem shares, with individual owners stepping in if the company declines. 

This structure provides adaptability and ensures that ownership transitions can be managed in the most practical way at the time of the trigger event.

Key Triggers in Buy-Sell Agreements

Buy-sell agreements are designed to address specific life and business events that could disrupt ownership balance. Some of the most common triggers include:

• Death of an owner – The accord ensures heirs are compensated while maintaining continuity for the business.
• Disability or incapacity – The accord provides a mechanism for transfer if an owner can no longer contribute effectively.
• Retirement or voluntary exit – The accord allows owners to plan succession in advance, avoiding rushed negotiations.
• Divorce or bankruptcy – The accord protects ownership interests from being transferred involuntarily to third parties.
• Disputes or forced exits – The accord establishes procedures for resolving disagreements without destabilizing the company.
  

Each trigger requires careful definition within the agreement to avoid ambiguity and to protect both the departing owner and those remaining.

Valuation Methods in Buy-Sell Agreements

Determining the value of a business interest is often the most contentious aspect of ownership transfers. To prevent disputes, buy-sell agreements must establish a clear valuation method. Some of the options here include:

• Fixed price agreement – Owners agree on a set price for ownership interests, though this requires regular updates to reflect business growth.
• Formula-based valuation – Uses financial metrics such as revenue multiples, earnings, or book value to calculate ownership worth. This method introduces objectivity but may not capture intangible factors.
• Independent appraisal – Involves engaging a neutral third-party appraiser to determine fair market value. This approach provides flexibility but may introduce delays or costs.
  

Regardless of the chosen method, accords should specify how often valuations are reviewed and updated. Without regular adjustments, outdated valuations can lead to inequitable outcomes.

Funding a Buy-Sell Agreement

Funding is vital to how effective a buy-sell agreement is. Even with a clear valuation, the ability to finance the buyout determines whether the accord can be executed smoothly. Some common funding methods include:

Method	Features	Advantages	Disadvantages
Life insurances	Policies are taken out on co-owners, providing immediate liquidity to fund buyouts in the event of death	Provides greater certainty	Requires ongoing premium payment
Company reserves or sinking funds	Businesses set aside capital over time to cover potential future transfers	Utilizes what the company already has available	Reduces liquidity available for operations
Borrowing or financing	Companies or co-owners seek loans to fund buyouts	Doesn’t rely on internal capital resources	Adds repayment obligations and financial risk. With partnerships, this may also contribute to the question of “Does my business credit affect my personal credit​?”

Legal and Practical Considerations

A buy-sell agreement must be carefully drafted to align with the company’s structure, jurisdiction, and tax environment. As a result, it is essential to arrange a legal review to ensure compliance with all relevant corporate, tax, and contract regulations and legislation. In some instances, it can even be wise to explore what is a corporate seal​ to create a further legal connection between the accord and the company.

Some of the common mistakes companies make here include relying on outdated agreements, failing to specify valuation methods clearly, or neglecting to establish adequate funding mechanisms.

Professional advisors—such as attorneys, accountants, and business consultants—are invaluable collaborators in helping a company avoid these pitfalls. They can provide guidance not only on legal compliance, but also vital practical considerations such as communicating the accord to all relevant stakeholders and ensuring that it reflects the company’s evolving circumstances.

Global Perspective on Buy-Sell Agreements

While buy-sell agreements are most commonly associated with U.S. corporate practice, there are similar mechanisms for companies across the globe. Jurisdictions tend to differ significantly in how they regulate ownership transfer and succession planning, though. Some countries impose restrictions on foreign ownership, while others require governmental approvals for share transfers. 

Multinational companies face additional challenges in drafting agreements that comply with multiple legal systems simultaneously. In these contexts, a global perspective is essential. Entrepreneurs and investors must consider cross-border implications, currency risks, and cultural approaches to succession when structuring agreements. Professional business consultants with international experience are vital partners in navigating these complexities.

FAQs

What is a buy-sell agreement?

A buy-sell agreement is a legal contract among co-owners that governs how ownership interests are transferred if certain events occur. It provides clarity and continuity in times of transition.

When should a business create a buy-sell agreement?

It is best to establish a buy-sell agreement early, ideally when the business is first formed. Doing so prevents disputes and ensures that succession planning is integrated into the company’s foundation.

What are the main types of buy-sell agreements?

The three main types are cross-purchase agreements, redemption agreements, and hybrid agreements. Each suits different business structures and ownership dynamics.

How is the value of a business determined in a buy-sell agreement?

Valuation can be established using fixed prices, financial formulas, or independent appraisals. Regular updates are necessary to ensure fairness and accuracy.

How are buy-sell agreements funded?

Funding can be arranged through life insurance policies, company reserves, or financing arrangements. The chosen method should reflect the business’s financial strategy.

Can buy-sell agreements be changed?

Yes, buy-sell agreements should be updated as the business evolves, ownership changes, or valuation methods require revision. Flexibility ensures that the agreement remains relevant and enforceable.

References

Lambert, H. (2018, September). Considerations for Using Buy-Sell Agreements. CPA Journal. https://www.cpajournal.com/2018/10/03/considerations-for-using-buy-sell-agreements 

Hylant. (2025, April 24). Using Life Insurance to Fund a Buy-Sell Agreement. Hylant. https://hylant.com/insights/blog/using-life-insurance-to-fund-a-buy-sell-agreement