• A buy-sell agreement (also called a business will or buyout agreement)[1] states ownership changes if a partner or owner suddenly leaves the company.
• It’s also called a business will because it guides the succession of business interests if a partner exits unexpectedly due to retirement, death, disability, or other unforeseen circumstances.
• It’s also an important instrument in real estate, where it is used for properties with fractional or co-ownership where one owner leaves, dies, or divests their ownership interest.
• A buyout agreement typically helps business owners maintain control over their partners, minimize disputes, decrease disruptions during a transition, and avoid unwanted scenarios.

A buy-sell agreement is a legally binding contract between co-owners of a business, outlining the terms and conditions under which buyers can buy a departing owner’s shares. It’s also called a business will because it guides the succession of business interests if a partner exits unexpectedly due to retirement, death, disability, or other unforeseen circumstances.

Buy-sell agreements can serve similar functions to a prenuptial agreement and a will, specifically in a business context.

It includes three main things:

1. A triggering event (such as death or disability)[2].
2. A valuation method to specify how much the departing owner’s stake is worth.
3. Terms of payment, including details on how the buyout will be funded.

In many partnerships and proprietorships, a buy-sell agreement helps control changes in ownership and business participation[3]. These agreements are a practical approach to protect a company, employees, customers, and other stakeholders[4].

Moreover, a buyout agreement often provides a pre-planned exit strategy for business partners[5]. The agreement clarifies ownership changes if a partner exits the company and outlines a fair sale price for a partner’s interest in the company. It also explains when and how a partner’s share is distributed to the partner’s successor.

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A buy-sell agreement in real estate is often used among co-owners of a property or within a real estate investment group. This type of agreement helps manage situations where one owner wishes to sell their interest or when certain events occur, like death, disability, bankruptcy, or even disagreements among the owners.

Its uses include:

• Right of first refusal. A common element in real estate buy-sell agreements is the right of first refusal. This allows the remaining owners to buy the departing owner’s interest before offering it to outside buyers[6].
• Ownership transfer. The agreement specifies what happens in various scenarios, such as an owner’s death, retirement, divorce, or if an owner wants to sell their share. For example, life insurance policies often fund buyouts upon an owner’s death.
• Dispute resolution. If the owners disagree about a proposed sale or the property’s value, the buy-sell agreement can provide a dispute resolution process, which may involve mediation or arbitration.
• Financing terms. The agreement may also outline how the buyout will be financed, which can be particularly important in real estate where the values involved can be substantial. For this purpose, real estate investors may sometimes use creative funding methods, such as seller financing or even life insurance policies[7].

A buy-sell agreement should generally include five elements[8].

1. List of Buyout Conditions

These include events that trigger buyouts, such as death, disability, retirement, resignation, termination, bankruptcy, divorce, and an offer to sell.

2. Structure for Buying or Selling Business Interests

This provision typically details the conditions and plans for buying or selling a partner’s or owner’s share in the business.

3. Updated Valuation

This section sets the fair market value for the owner’s stake and fixes the price at which a partner’s business interest will be bought or sold. This valuation considers the business’s financial performance, industry trends, current market conditions, and other relevant aspects.

4. Sources of Funding for a Purchase or Sale of a Business Partner’s Interests

A buy-sell agreement typically includes various funding instruments like cash, cash equivalents, installment payments, loans, financing, and life insurance. There are other unconventional methods to buy the departing owner’s interest as well, such as seller’s paper.

5. Tax and Estate Planning Considerations

Buyout agreements should define how to distribute taxes between partners or co-owners and detail how the sale price is adjusted for tax liabilities. They should also include estate planning provisions, such as using trusts or other methods to transfer ownership interests to heirs or beneficiaries.

Each element assesses a department or function’s performance in an organization, giving insight into its success compared to its goals and objectives.

Buy-sell agreements require partners or owners to buy out the departing co-owner’s stake, or at least offer the partners the chance to do so before anyone else (hence its other name as a buyout agreement).

In such agreements, partners must follow the process outlined below[9].

1. Identify the triggering buyout events.
2. Determine who holds the rights and purchase obligations.
3. List the names and addresses of the purchasers.
4. Set a purchase price or valuation, considering any applicable discounts.
5. Define payment terms and their corresponding intervals.
6. Be aware of the implications when purchase rights are not exercised.
7. Decide on a valuation method to use.
8. Allocate shares or establish how to distribute them.

Is a Buy-Sell Agreement Necessary?

A buy-sell agreement may be necessary, especially in partnership-based organizations. It’s essential in preventing future disputes and safeguarding the interests of business co-owners. Without an agreement, disputes over ownership interests can quickly get out of hand and even ruin the business[10].

A buy-sell agreement’s primary advantage is its organized method for passing on ownership when certain events occur.

Other industries also enjoy various benefits from buy-sell agreements. Depending on the specifics of the agreement and the circumstances, it may help ensure enough cash is on hand to pay off taxes and other costs when settling an estate[11].

Here’s a detailed breakdown of a buy-sell agreement’s pros and cons.

Pros

• Clarity and certainty. In real estate, a business will or buy-sell agreement can detail the rules for buying or selling property. It gives clear guidance and assurance to everyone involved. It can also help prevent disputes or disagreements over the property value or the terms of the sale.
• Control and flexibility. A buy-sell agreement lets business partners choose future partners if needed. In real estate, this agreement can say that only certain people can buy the property, or it can only be used for specific things.
• Protection against unexpected events. A buyout agreement provides a trusted method for transferring business interests, protecting partners from unexpected events.
• Tax advantages. Depending on the buyout agreement’s setup, the business and its owners can enjoy tax benefits.

Cons

• Irrelevance. Sometimes, business owners may want their family members, like their spouse or beneficiaries, to inherit their business interests. In this case, a business will may be unnecessary[12]. That said, having a buy-sell agreement in place can still provide structure and prevent disputes.
• Limited options. If a buy-sell agreement restricts the owner’s interest to only a few chosen buyers, it can limit the number of possible buyers and possibly lower the interest’s worth.

Sentimental value can be expensive.

• Potentially unrealistic purchase price. The agreed price may not match the business’s actual value, especially when people’s feelings come into play.
• Impracticality. In cases where all owners are indispensable, it may make more sense to sell the business and share its assets among the owners instead of running the company with fewer owners.

1. Kenton, W. (2022, September 13.) Buy-Sell Agreement Definition, Types, Key Considerations.  Investopedia. Retrieved from https://www.investopedia.com/terms/b/buy-and-sell-agreement.asp
2. The Buy-Sell Agreement. (n.d.) Buchanan Law. Retrieved from https://www.buchananlaw.com/the-buysell-agreement
3. Buy-Sell Agreement. (n.d.) Cornell Law School. Retrieved from https://www.law.cornell.edu/wex/buy-sell_agreement
4. Buy-Sell Agreement. (n.d.) Contracts Counsel. Retrieved from https://www.contractscounsel.com/t/us/buy-sell-agreement
5. Cowart, H. (2020, May 11.) Partner Exit Strategies: Buy-Sell Agreements in the Age of Coronavirus.  Hendershot Cowart P.C. Retrieved from https://www.hchlawyers.com/blog/2020/may/partner-exit-strategies-buy-sell-agreements-in-t/
6. Steinberg, S. (2023, May 16.) What Is The Right Of First Refusal (ROFR) In Real Estate And How Does It Work? Rocket Mortgage. Retrieved from https://www.rocketmortgage.com/learn/right-of-first-refusal
7. Puri, J. (2023, January 23.) What is a buy-sell agreement?  Policy Advisor. Retrieved from https://www.policyadvisor.com/life-insurance/what-is-a-buy-sell-agreement/
8. What Are Five Things Every Buy-Sell Agreement Should Contain? (2022, February 19.) Mullen Holland & Cooper. Retrieved from https://www.mhc-law.com/what-are-five-things-every-buy-sell-agreement-should-contain/
9. Wood, M. (2020, November 18.) Buy-Sell Agreement: What Is It and Do You Need One for Your Business? Nerd Wallet. Retrieved from https://www.nerdwallet.com/article/small-business/what-is-a-buy-sell-agreement
10. The Importance of a Buy-Sell Agreement. (2011, January 12.) Clark Schaefer Hackett Business Advisors. Retrieved from https://www.cshco.com/articles/the-importance-of-a-buy-sell-agreement/
11. ​Benefits of a Buy-Sell Agreement. (n.d.) Modern Woodmen. Retrieved from https://www.modernwoodmen.org/financial-planning/business-planning/benefits-of-a-buy-sell-agreement/
12. Klasing, D. The disadvantages of using a buy-sell agreement? (2014, March 25.) Tax Law Offices of David W. Klasing. Retrieved from https://klasing-associates.com/question/disadvantages-using-buy-sell-agreement/.