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A Buy-Sell Agreement is a legal contract that sets rules for what happens if a business owner leaves, retires, becomes disabled, files for bankruptcy, divorces, or dies. It explains who can buy the owner’s interest and how the transfer takes place.
Last Update March 2nd, 2026
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A Buy-Sell Agreement, is a contract between co-owners of a business. It controls how ownership interests can be transferred.
Also called a buyout agreement or business penup, this legal document applies to corporations, LLCs, and partnerships.
The agreement may cover:
The main function of a Buy-Sell Agreement is to protect the company and the remaining owners. It prevents unwanted third parties from becoming owners. It also reduces disputes over valuation and payment terms.
This binding contract is recognized tools for business continuity planning under U.S. corporate and estate planning practices.
The purpose of a Buy-Sell Agreement is to provide certainty when making plans for your business.
It sets clear rules for:
These can help reduce the risk of any disputes between owners moving forward. This means that your business can continue operating if an owner exits, as a plan has been made.
Take a look at our Buy-Sell Agreement example before you begin your own draft of the document. This sample can help you understand the different clauses included and the general structure of the document:
So how does a Buy-Sell Agreement work? They’re commonly used when:
You should try to make and adopt this type of agreement when your business is stable and all company owners are aligned.
There are several recognized structures used in business planning:
| Type | Explanation |
|---|---|
| Cross-Purchase Agreement | The remaining owners agree to buy the departing owner’s interest directly. |
| Entity-Purchase (Redemption) Agreement | The business entity itself buys back the departing owner’s interest. |
| Wait-and-See Agreement | The company has the first option to purchase. If it declines, the remaining owners may buy. |
| One-Way Buy-Sell Agreement | One specific party has the right or obligation to buy another’s interest. Often used in family businesses. |
You can decide the right structure by looking at your business and its needs. The structure changes based on various factors, like:
A Buy-Sell Agreement generally includes:
If you clearly set out all of these details, you can avoid ambiguity and clashes or disputes in the future.
You can instantly receive a comprehensive Buy-Sell Agreement using our customizable template. Simply fill in the details regarding your company, and download the finished document.
There are two types of this agreement: cross-purchase or entity-purchase arrangements. There are some key differences between the two you need to be aware of when drafting your own agreement:
| Feature | Cross-Purchase | Entity-Purchase (Redemption) |
|---|---|---|
| Who buys the interest? | The remaining owners | The business entity |
| Who pays? | Owners pay personally (or via their policies) | Company pays using company funds |
| Ownership result | Remaining owners’ individual stakes increase | Owners’ % increase because units/shares are retired |
| Best for | Few owners | Many owners |
| Common funding | Life insurance on owners is often used | Company may use cash/financing/insurance |
Here are some other available documents that may be useful for you if you’re preparing a Buy-Sell Agreement:
Here are some frequently asked questions about Buy-Sell Agreements.
The price is determined using a valuation method stated in the agreement. Common methods include:
You may need to update your agreement over time to make sure that valuations are accurate.
Your Buy-Sell Agreement should state how a buyout will be funded. Payment may be made in a lump sum or through installments with interest.
If an owner passes away, businesses often use life insurance proceeds to provide liquidity for the purchase.
Yes, in many cases it can reduce or avoid probate for the business interest. The agreement requires the interest to transfer according to its terms rather than through standard estate distribution. However, probate rules vary by state and legal advice may be necessary.
No, it does not automatically eliminate estate taxes. However, when properly structured, it can establish a clear valuation method that may help determine the taxable value of the business interest. Estate planning and tax treatment depend on federal and state law and individual circumstances.
