What is a Buy-Sell Agreement?

by | Aug 25, 2025 | Commercial

If your business has two or more owners, a buy-sell agreement is essential. If a co-owner dies, becomes incapacitated, or leaves the business for any triggering event specified in the agreement, a buy-sell agreement typically requires the remaining owners to purchase the departing owner’s interest in the business (not just assets). The cost of this purchase is usually covered by business insurance.

Buy-sell agreements typically include:

  • a complete list of each owner’s current equity stakes,
  • valuation methodology,
  • details of any life insurance or disability insurance policies funding the buyout,
  • tax and estate planning considerations, and
  • specific terms governing the purchase and transfer of ownership interests.

The ownership interest must be valued according to specific methodologies defined in the agreement. The business value can be determined through:

  • an independent professional appraiser’s valuation,
  • a fixed-price formula specified in the agreement, or
  • an agreed-upon value that is periodically reviewed and updated by the owners according to a defined schedule.

The agreement establishes the mandatory procedures for transferring ownership interests upon a triggering event. These include:

  1. Cross Purchase Agreements – where the remaining owners directly purchase the departing owner’s interest according to their respective ownership percentages or other predetermined allocation.

OR

  1. Entity-Purchase Agreements – the business entity itself buys the available shares

Buy-sell agreements protect the company and its owners by:

  • preventing unauthorised transfers of ownership interests to third parties (including family members) without other owners’ consent,
  • establishing clear procedures for ownership transitions, and
  • providing a predetermined dispute resolution mechanism to minimise litigation risk.

Buy-sell agreements should be drafted by a qualified lawyer with expertise in business law and succession planning. Should you have any inquiries about creating a buy-sell agreement for your business, please do not hesitate to contact me. I am here to help.

DISCLAIMER: This article is for informational purposes only and does not constitute legal advice.

 

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