What Is a Buy-Sell Agreement?

A buy-sell agreement is the contract among business co-owners that decides, in advance, what happens to an owner's interest when a triggering event hits: death, disability, retirement, termination, divorce, bankruptcy, or a simple desire to leave. It typically gives the company or the remaining owners the right or the obligation to purchase the departing interest, and it fixes how the price will be set and paid.

The heart of every buy-sell is the valuation mechanism: a fixed price the owners update periodically, a formula tied to earnings or book value, or an appraisal process. The funding mechanism matters just as much, since a buyout right nobody can afford to exercise is a lawsuit waiting to happen; life insurance commonly funds death buyouts. Well-drafted agreements also handle transfer restrictions, rights of first refusal, and drag along and tag along rights.

Most partner litigation we see traces back to a buy-sell that was never signed, went stale, or left the valuation ambiguous. It is far cheaper to fix the document while everyone is still friends than to litigate the gap after they are not.