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A buy-sell agreement is a contract among business owners that sets what happens to an owner's share if they die, become disabled, retire or leave. It fixes who may buy the interest and how the price is set. Life and disability insurance are commonly used to fund the purchase so the cash is available when the event happens.
The main structures are cross-purchase, where owners insure each other, and entity redemption, where the business owns the policies; hybrids exist. Each has different tax and administrative effects, so the agreement itself should be drafted by the owners' attorney, with the insurance producer sizing and placing the funding.
The most common failure is a valuation that was never updated. A buy-sell funding calculator is built and awaiting release; the questions it will raise, current business value and each owner's percentage, are worth asking any business owner who has not reviewed the agreement in years.
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