What is a buy-sell agreement in a business context?

A buy-sell agreement is fundamentally a contract that outlines the transfer of ownership in a business when a specific triggering event occurs, such as the death, incapacity, or departure of an owner. This agreement ensures that the remaining owners or the business itself can buy the interest of the departing owner, providing a clear and financially viable path for the transition of ownership. By pre-arranging the terms of sale, a buy-sell agreement protects the interests of all parties involved, maintaining business continuity and preventing potential disputes among heirs or other stakeholders.

This type of agreement is critical in closely held businesses where ownership is limited, as it provides clarity and stability. Without a buy-sell agreement, the ownership interest of a deceased partner could fall into the hands of relatives or outsiders, which could destabilize the operation of the business and conflict with the remaining partners’ intentions and strategic goals.