Corporate & Business

Buy-Sell Agreement: Who Buys an Owner's Share, at What Price, and How It Is Paid

A buy-sell agreement is a binding contract among the co-owners of a business that controls what happens to an owner's interest on a triggering event, setting who may buy, at what price, and how the buyout is funded.

This page explains what a buy sell agreement is, the cross-purchase and entity-purchase forms, the events that trigger a buyout, how the price is set, how life insurance funds the purchase, how the agreement fits an LLC, corporation, or partnership, and how to set one up.

Commission a Buy-Sell Agreement Compare the Two Forms

Reviewed by Jason Lee, Esq., Corporate AttorneyNew York Bar, Massachusetts BarUpdated 2026-07-20

Buy-sell agreement diagram showing the three core elements: the triggering events that start a buyout, the valuation method that sets the price, and the funding that pays for the departing owner's interest

Trigger · Price · Funding

Three questions the agreement answers in advance

Trigger-Complete

Death, disability, retirement, divorce, bankruptcy, and voluntary or involuntary departure are each addressed, so no exit event is left to chance.

Price Fixed in Advance

A fixed value, a formula, or an appraisal names the purchase price before any trigger, so the buyout is not negotiated under pressure.

Funded, Not Improvised

Life insurance, disability buyout coverage, or installment notes supply the cash for the buyout without draining the business.

Attorney Reviewed

A licensed corporate attorney reviews the structure, the valuation clause, and the funding plan against your entity type before delivery.

Definition

What Is a Buy-Sell Agreement and Why Every Co-Owned Business Needs One

A buy-sell agreement, sometimes written as a buy sell agreement, exists to answer one question before it becomes a crisis: what happens to an owner's share of the business when that owner leaves. It is a binding contract among the co-owners, and often the business entity itself, that fixes who may buy a departing owner's interest, at what price, and how the purchase is paid. Because the terms are settled while everyone is still on good terms, no one has to negotiate a buyout in the middle of a death, a divorce, or a falling-out.

Without a buy-sell agreement, the default outcomes are rarely what the owners would have chosen. A deceased owner's interest can pass to heirs who have no role in the business and no interest in running it. A divorcing owner's stake can be pulled into a marital settlement and end up partly owned by a former spouse. A departing owner can sell to a competitor or an outsider the remaining owners never approved. Each of these is a live risk the moment a business has more than one owner, and each is exactly what the agreement is built to prevent.

The document is transactional, not litigation. It is drafted by an attorney and executed by the owners, who sign it and keep it with the company records; it is never filed in court. Its force comes from careful drafting and proper signature, which is why a buy-sell agreement sits alongside the shareholder agreement as one of the foundational contracts a closely held business executes.

The Two Forms

Cross-Purchase vs Entity-Purchase (Redemption) Buy-Sell Agreements

The first structural choice is who does the buying. In a cross-purchase, the remaining owners buy the departing owner's interest individually. In an entity-purchase, also called a redemption, the business itself buys the interest back. The choice drives the number of funding policies, the tax basis the buyers receive, and the administration as the owner count grows.

Cross-Purchase

Owners Buy From Each Other

The remaining owners individually purchase the departing owner's interest. Each owner is a buyer and typically holds a funding policy on every other owner. The buyers get a stepped-up cost basis in the interest they acquire, which lowers their capital gains tax on a later sale.

Best fit: two to a few owners

Entity-Purchase / Redemption

The Business Buys Back the Share

The company itself redeems the departing owner's interest, so the surviving owners' percentages simply rise. The business holds one funding policy on each owner. Administratively simpler as the owner count grows, but the survivors receive no basis step-up.

Best fit: several owners

Wait-and-See / Hybrid

Decide at the Trigger

The agreement gives the company the first option to redeem, then the owners the option to cross-purchase, and requires whichever party is best positioned to complete the buyout. It preserves flexibility on tax and funding until the triggering event actually happens.

Best fit: uncertain or changing ownership

The transfer restrictions and right of first refusal that make any of these structures work are the same mechanics a partnership agreement uses to keep a partnership interest from passing to an outsider.

The Triggers

Buy-Sell Agreement Triggering Events: Death, Disability, Retirement, Divorce, and Departure

A triggering event is what starts a buyout under the agreement. The death, disability, and retirement triggers are the ones most people expect, but a complete agreement also reaches divorce, bankruptcy, and both voluntary and involuntary departures, so an interest cannot slip to a former spouse, a bankruptcy trustee, or an outsider. Each trigger can be mandatory or optional and can carry its own price and payment terms.

Death of an owner, usually a mandatory buyout funded by life insurance
Permanent disability that prevents an owner from working in the business
Retirement or reaching an agreed exit age
Voluntary departure or resignation of an owner-employee
Involuntary termination of an owner-employee for cause
Personal bankruptcy or insolvency of an owner
Divorce, so an interest cannot pass to a former spouse in a settlement
Attempted transfer to an outside party, triggering a right of first refusal
Loss of a professional license required to hold the interest
Material breach of the owners' agreement

The distinction between a mandatory and an optional trigger matters. A death or disability buyout is usually mandatory and funded by insurance, because the estate needs liquidity and the business needs certainty. A voluntary departure is often handled through a right of first refusal at a formula price with installment payments, which gives the remaining owners control without forcing an immediate cash outlay.

Setting the Price

Valuation Methods for a Buy-Sell Agreement: Fixed Price, Formula, and Appraisal

A buy-sell agreement is only as strong as the valuation method that sets the price when a trigger fires. An agreement that merely promises fair value invites a fight, so a well-drafted agreement names the exact method used to price the interest on a departure, and states how and when the number is refreshed.

Fixed or agreed value

The owners state a set price per unit of ownership and revisit it on a stated schedule, usually annually, by signing a certificate of agreed value. Simple and predictable, provided the owners actually refresh the number rather than letting it grow stale.

Formula value

The interest is priced by a stated calculation, such as a multiple of earnings before interest, taxes, depreciation, and amortization, a multiple of revenue, or adjusted book value. Predictable and inexpensive to administer, and it tracks the business as it grows.

Independent appraisal

A qualified business appraiser determines fair market value as of the trigger date. The agreement names how the appraiser is chosen and how competing appraisals are reconciled, which removes bias between the departing owner and the buyers.

Combined or default method

Many agreements use the agreed value if it was updated within the last year and fall back to an appraisal if it was not. Combining methods guards against a stale fixed price without giving up the certainty of an agreed number.

The most common failure in practice is a fixed value that no one updated. An agreed price set years ago, before the business doubled in size, can force a departing owner or a deceased owner's estate to accept a fraction of true value, or hand the buyers a windfall. That is why the agreement should require the owners to sign a fresh certificate of agreed value on a set schedule, and default to an appraisal if they let the number go stale.

Funding the Buyout

Funding a Buy-Sell Agreement With Life Insurance

A buyout is only real if the cash is there to complete it. Life insurance is the most common way to fund the death trigger in a life insurance buy-sell agreement, because the proceeds arrive as tax-free cash exactly when the buyout is due, without draining the company's working capital or forcing the survivors to borrow. Who owns the policies follows the structure: in a cross-purchase each owner insures every other owner, and in an entity-purchase the company insures each owner.

A worked example shows how the policy count differs. Take three equal owners of a business worth 3,000,000 dollars, so each interest is worth 1,000,000 dollars. Under a cross-purchase, when one owner dies the two survivors each buy half of the deceased owner's interest for 500,000 dollars, so every owner carries a 500,000 dollar policy on each of the other two. That is six policies of 500,000 dollars in total. Under an entity-purchase, the company instead holds three policies of 1,000,000 dollars, one on each owner, and redeems the full interest itself. Same 3,000,000 dollars of total coverage, arranged two different ways.

Death is not the only trigger that needs funding. Disability buyouts are funded with disability buyout insurance or with installment notes, since the departing owner is alive to be paid over time. Retirement and voluntary departures are commonly funded through installment payments or a sinking fund, spreading the cost over several years so the business can absorb it. The funding is always sized to the valuation, so the money available matches the price the agreement sets.

By Entity Type

Buy-Sell Agreement for a Small Business: LLC, Corporation, and Partnership

Any small business with more than one owner benefits from a buy-sell agreement, and the document adapts to the entity type. What it restricts, and which companion document it coordinates with, changes depending on whether the owners hold shares, membership interests, or partnership interests.

Corporation

The buy-sell agreement governs the transfer of shares, sets the transfer restrictions and right of first refusal, and coordinates with the shareholder agreement. Share certificates carry a legend noting the restriction so a buyer is on notice.

LLC

The buy-sell provisions restrict the transfer of membership interests and are often built directly into the operating agreement or executed as a companion document, so a member cannot hand an interest to an outsider without the others' consent.

Partnership

The agreement controls the transfer of partnership interests and coordinates with the partnership agreement. This matters because the departure of a partner can otherwise dissolve the partnership by operation of law absent a continuation provision.

For a multi-member company, the transfer restrictions are frequently built straight into the LLC operating agreement, so the buy-sell terms and the governance terms live in one place. Where the plan is instead to sell the whole company to an outside buyer rather than among the owners, the deal runs through a share purchase agreement instead.

Setting One Up

How to Set Up a Buy-Sell Agreement

Six steps take a buy-sell agreement from a roster of owners to a funded, priced, and signed contract. The owners and the triggering events are settled first, because they decide the structure, the valuation, and the funding that follow.

1
Inventory the owners and the exit events
List every current owner and the interest each holds, then decide which events trigger a buyout: death, disability, retirement, divorce, bankruptcy, and voluntary or involuntary departure. This is fixed first because it defines everything downstream.
2
Choose the structure
Decide between a cross-purchase, an entity-purchase (redemption), or a wait-and-see hybrid. The choice turns on the number of owners and the tax basis consequences, so it is settled before pricing and funding.
3
Fix the valuation method
Name a fixed or agreed value, a formula, an independent appraisal, or a combination, and state how and when the price is refreshed. The method is chosen now so the price is never negotiated under the pressure of a trigger.
4
Arrange the funding
Match each trigger to a funding source: life insurance for death, disability buyout coverage for disability, and installment notes or a sinking fund for retirement and departure. Funding is sized to the valuation so the cash is there when the buyout is due.
5
Draft and execute the agreement
The instrument names the parties, the triggers, the structure, the price mechanism, the funding, the payment terms, a joinder for new owners, and a certificate legend. Every current owner signs, because the agreement binds only those who execute it.
6
Review on a set schedule
The owners revisit the agreed value, the funding amounts, and the ownership roster at least annually and whenever an owner joins or leaves. A stale value or an underfunded policy is where a buy-sell agreement fails in practice.

Reviewed By

Jason Lee, Esq.

Corporate Attorney

New York Bar, Massachusetts Bar

Robert Nash, Esq.

Senior Contract Attorney

J.D., NYU School of Law, NY Bar

David Chen, Esq.

Legal Review Director

J.D., Columbia Law School, NY & NJ Bar

Part of the corporate stack: the shareholder agreement that governs voting and share transfers, the partnership agreement for unincorporated ventures, and the LLC operating agreement that houses the buy-sell terms for a multi-member company.

FAQ

Buy-Sell Agreement: Common Questions

What is a buy-sell agreement?

A buy-sell agreement is a binding contract among the co-owners of a business, and often the business entity itself, that controls what happens to an owner's interest when a triggering event occurs. It answers three questions in advance: who may buy a departing owner's share, at what price, and how the purchase is paid. Triggering events typically include an owner's death, disability, retirement, divorce, bankruptcy, or voluntary or involuntary departure. Without a buy-sell agreement, a deceased owner's shares can pass to heirs who have no role in the business, a divorcing owner's interest can be caught in a marital settlement, and a departing owner can sell to an outside party the remaining owners never chose. The agreement is a private contract that the owners sign and keep with the company records; it is not filed in court. It is one of the most important documents a closely held business ever executes.

What is the difference between a cross-purchase and an entity-purchase buy-sell agreement?

The difference is who does the buying. In a cross-purchase buy-sell agreement, the remaining owners individually buy the departing owner's interest, so each owner is a buyer and typically holds a funding policy on every other owner. In an entity-purchase agreement, also called a redemption agreement, the business itself redeems (buys back) the departing owner's interest, so the company holds one funding policy on each owner and the surviving owners' percentages simply increase. Cross-purchase gives the buying owners a stepped-up cost basis in the shares they acquire, which reduces their capital gains tax on a later sale, but it multiplies the number of insurance policies as the owner count grows. Entity-purchase is administratively simpler with more owners because the company holds one policy per owner, but the surviving owners get no basis step-up. Many agreements use a wait-and-see or hybrid structure that lets the parties decide between the two at the time of the trigger.

What events trigger a buy-sell agreement?

A well-drafted buy-sell agreement lists the specific events that start a mandatory or optional buyout. The core triggers are the death of an owner, permanent disability, and retirement. A complete agreement also covers voluntary departure or resignation, involuntary termination of an owner-employee, personal bankruptcy or insolvency, divorce (so an interest cannot pass to a former spouse in a marital settlement), an attempted transfer to an outside party, loss of a required professional license, and a material breach of the owners' agreement. Each trigger can carry its own treatment: a death or disability buyout is usually mandatory and funded by insurance, while a voluntary departure may be handled through a right of first refusal at a formula price with installment payments. Spelling out each event, and whether the buyout is mandatory or optional, is what keeps a departure from turning into a dispute.

How is the price set in a buy-sell agreement?

A buy-sell agreement fixes the purchase price through one of three main methods, or a combination of them. A fixed or agreed value states a set price per unit of ownership that the owners revisit and update on a stated schedule, usually annually, by signing a certificate of agreed value. A formula prices the interest using a stated calculation, such as a multiple of earnings before interest, taxes, depreciation, and amortization, a multiple of revenue, or adjusted book value. An independent appraisal has a qualified business appraiser determine fair market value as of the trigger date, with the agreement naming how the appraiser is chosen and how competing appraisals are reconciled. Many agreements combine methods, for example using the agreed value if it was updated within the last year and defaulting to an appraisal if it was not. The critical point is that the method is named in advance, so the price is not negotiated under the pressure of a death or a dispute.

How does life insurance fund a buy-sell agreement?

Life insurance is the most common way to fund the death trigger in a buy-sell agreement because the proceeds arrive as tax-free cash exactly when the buyout is due, without draining the company's working capital or forcing the survivors to borrow. In a cross-purchase structure, each owner holds a policy on every other owner and uses the death benefit to buy the deceased owner's share. In an entity-purchase (redemption) structure, the company owns one policy on each owner and uses the proceeds to redeem the interest. Consider three equal owners of a business worth 3,000,000 dollars, so each interest is worth 1,000,000 dollars. Under cross-purchase, the two survivors each buy half of the deceased owner's interest for 500,000 dollars, so each owner carries a 500,000 dollar policy on each of the other two, which is six policies of 500,000 dollars in total. Under entity-purchase, the company instead holds three policies of 1,000,000 dollars, one on each owner. Disability buyouts are funded with disability buyout insurance or installment notes, since the departing owner is alive to be paid over time.

Does an LLC, corporation, or partnership need a buy-sell agreement?

Yes. Any business with more than one owner benefits from a buy-sell agreement, and the document adapts to the entity type. In a corporation, the buy-sell agreement governs the transfer of shares and often lives alongside a shareholder agreement. In a multi-member LLC, the buy-sell provisions restrict the transfer of membership interests and are frequently built directly into the operating agreement or executed as a companion document. In a partnership, the agreement controls the transfer of partnership interests and coordinates with the partnership agreement, which is especially important because the departure of a partner can otherwise dissolve the partnership by operation of law. A single-owner business generally does not need a buy-sell agreement, though a one-owner company planning for succession may use a one-way agreement that lets a key employee or family member buy the business on the owner's death or retirement.

Is a buy-sell agreement legally binding?

Yes. A buy-sell agreement is a contract, and it binds every owner who signs it once it meets the ordinary requirements of contract formation: offer, acceptance, consideration, and mutual assent. Courts routinely enforce buy-sell provisions, including the transfer restrictions, the mandatory purchase on a triggering event, and the agreed valuation method, so long as the terms are clear and the price mechanism is not unconscionable. To be enforceable against a new owner, the agreement should require that anyone acquiring an interest sign a joinder agreeing to be bound, and the share certificates or membership records should carry a legend noting the transfer restriction. Because the agreement is executed by the parties rather than filed with a court, its force comes entirely from careful drafting and proper signature by every current owner.

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