How Buy/Sell Agreements Work
Updated: Feb 8
Buy and sell agreements are commonly used by sole proprietorships, partnerships, and closed corporations in an attempt to smooth transitions in ownership when each partner dies, retires, or decides to exit the business.
The buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula.
In the case of the death of a partner, the estate must agree to sell.
There are two common forms of agreements:
- In a cross-purchase agreement, the remaining owners purchase the share of the business that is for sale.
- In a redemption agreement, the business entity buys the share of the business.
In order to ensure that funds are available, partners in business commonly purchase life #insurance policies on the other partners. In the event of a death, the proceeds from the policy will be used towards the purchase of the deceased's business interest.
When a sole proprietor dies, a key employee may be designated as the buyer or successor.
You need one only if you care about the continuation of the business in the event of an untimely death.