Buy-Sell Agreement
The 'prenup' between business co-owners — what happens to ownership when someone dies, becomes disabled, divorces, or wants out.
What it is
A binding agreement among co-owners that pre-defines (a) the trigger events, (b) the valuation method or formula, and (c) the funding source for buying out a departing owner's interest.
Common structures
Cross-purchase (each owner buys out the other) — works for 2 owners; gets unwieldy fast with more. Entity redemption (the company buys back the shares) — simpler but has tax implications. Hybrid / wait-and-see — flexible structure that picks the better option at trigger time.
Funding sources
Life insurance for death; disability buy-out insurance; sinking fund; bank financing; seller-financed installment notes. Most agreements name a source but don't actually fund it — that's the gap to close.
Watch out for
- •A formula valuation set 10 years ago is almost always wrong today — review every 2–3 years.
- •Cross-purchase with 4+ owners means many policies — switch to a partnership-owned structure.
- •Spousal consent matters in community-property states.
Educational only — not tax, legal, or investment advice. Talk through your specific situation with a qualified advisor.