Buy-Sell Agreement Template
Set who can buy an owner's share, at what price, and on what triggers, before you ever need it.
Introduction
A buy-sell agreement is a contract among the owners of a business that decides in advance who may buy an owner's share, at what price, and on what triggers such as death, disability, divorce, retirement, or a voluntary exit. It keeps ownership inside the group, gives the remaining owners a clear path to buy, and prevents a forced sale or a dispute when someone leaves. The core terms are the same nationwide: the structure (cross-purchase, entity redemption, or a hybrid), the triggering events, the valuation method, and how the buyout is funded. A few rules do vary by state, most notably spousal consent in community-property states and how a non-compete on a departing owner is enforced, so check the version for your state.
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Key Things to Know
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A buy-sell agreement is a binding contract among co-owners that fixes who can buy a departing owner's interest, the price or valuation method, and the triggering events, so a death, divorce, or exit does not force the business into a dispute or a sale to an outsider.
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There are three common structures. In a cross-purchase the remaining owners buy the departing owner's share; in an entity redemption the business itself buys it back; a hybrid or wait-and-see agreement lets the parties choose at the time of the trigger.
- 3
Set the triggers explicitly. The usual ones are death, long-term disability, retirement, voluntary departure, divorce, and bankruptcy of an owner. Each trigger can have its own price and payment terms, so define them rather than leaving them to negotiation later.
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Choose a valuation method and keep it current. Common methods are a fixed price the owners restate periodically, a formula such as a multiple of earnings, or an independent appraisal at the time of the trigger. Update the number at least once a year.
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Fund the buyout before you need it. Owners commonly use life or disability insurance on each owner, a sinking fund, or installment payments, so the buyer has cash when a trigger occurs. Match the funding to the valuation so the price and the money available line up.
- 6
Some rules vary by state. Community-property states may require a spouse's consent or notice before an owner disposes of a community-property business interest, and states differ on whether a non-compete on a departing owner is enforceable. See the version for your state for the specific rule.
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No notarization, witnesses, or government filing is required in most states. A buy-sell agreement is valid as a signed writing. Keep the signed agreement with the company records, note any transfer restriction on the share certificates, and review it after major changes. Attorney review is available.
Key Decisions
Professional Service Providers
These provisions control whether and how owners can transfer their interests to third parties during their lifetime. For professional service firms, controlling who becomes an owner is particularly important to maintain quality, culture, and client relationships. These restrictions help prevent unwanted partners from entering the business.
Complete restriction (no transfers without consent of all other owners)
Provides maximum control but least flexibility for owners. Common in small professional practices where personal relationships and trust are paramount.
Right of first refusal (owners must first offer their interest to the company or other owners before selling to a third party)
Balances flexibility with control. Allows owners to exit but gives remaining owners the opportunity to keep ownership within the existing group. Most common approach for professional service firms.
Most Common OptionPermitted transfers to family members or affiliated entities with professional qualifications
Allows limited flexibility for estate planning while ensuring transferees meet professional requirements. Useful for larger professional service firms with more complex ownership structures.
This determines whether the company itself or the remaining owners individually will purchase the departing owner's share. This choice affects tax consequences, funding mechanisms, and the resulting ownership structure after the purchase. Different approaches work better for different types of professional service firms and ownership structures.
Redemption (company purchases the interest)
Simplifies the transaction as only one purchaser is involved. Remaining owners' percentage interests increase proportionally without additional investment. May have different tax implications than cross-purchase.
Cross-purchase (remaining owners purchase the interest proportionally)
Each remaining owner directly purchases their proportional share. Can be complex with multiple owners but may offer tax advantages through increased basis in the business.
Hybrid approach (company has first option, then owners have right to purchase)
Provides flexibility to determine the best approach at the time of the triggering event. Most sophisticated option that maximizes tax planning opportunities and adaptability.
Most Common Option
Funding mechanisms determine how the remaining owners or the business will pay for the departing owner's share. Without proper funding, the obligation to purchase can create severe financial strain or even force liquidation of the business. The right funding approach ensures that cash is available when needed without creating undue financial burden.
Life and disability insurance (for death/disability triggers) with installment payments for other triggers
Balanced approach that provides immediate funding for unexpected events while allowing flexibility for planned departures. Most common for professional service firms where human capital is the primary asset.
Most Common OptionInstallment payments over time for all triggering events
Reduces immediate financial burden on the business but creates longer-term obligation to the departing owner. May include interest payments and security provisions.
Sinking fund or cash reserves set aside specifically for buy-outs
Requires discipline to maintain but provides ready cash when needed. Less common due to opportunity cost of setting aside capital that could be used in the business.
The valuation method determines how much the departing owner (or their estate) will receive for their share of the business. This is often the most contentious aspect of buy-sell agreements, as different methods can result in significantly different valuations. The right approach balances fairness to the departing owner with financial feasibility for the remaining owners.
Formula-based valuation (multiple of revenue, earnings, or book value)
Simple to implement and understand. Provides certainty but may not reflect true market value as circumstances change. Common for professional service firms with predictable cash flows.
Most Common OptionIndependent appraisal by a qualified business valuation expert
Most accurate but also most expensive. Provides an objective assessment but can lead to delays and additional costs each time a valuation is needed.
Agreed value periodically updated by owners
Owners set a value together and update it regularly (typically annually). Simple and inexpensive if owners maintain the discipline to update regularly, but can lead to disputes if updates are neglected.
Triggering events are specific circumstances that activate the buy-sell agreement, requiring the business or remaining owners to purchase a departing owner's interest. Different events have different implications for business continuity and financial planning. The events you choose will determine when ownership transfers are mandatory and help prevent unexpected situations where the business structure could be compromised.
All standard events (death, disability, retirement, voluntary departure, termination, divorce, bankruptcy)
Most comprehensive option that covers all major life and business events. Provides maximum protection but requires more detailed planning for each scenario.
Most Common OptionLimited events only (death and disability)
Focuses on involuntary departures only. Simpler to implement but leaves gaps for voluntary exits that could create uncertainty.
Customized triggers based on professional service context (includes license revocation, loss of professional credentials)
Tailored specifically for professional service firms where credentials are essential to the business. Adds protection against regulatory issues unique to licensed professionals.
First-time Entrepreneurs
Transfer restrictions determine whether and how owners can sell or transfer their interests to third parties during normal business operations (outside of triggering events). For first-time entrepreneurs, these provisions help maintain control over who your business partners are and prevent unwanted third parties from becoming co-owners. The right balance of restrictions protects the business while allowing reasonable flexibility for owners' personal circumstances.
Complete restriction (no transfers allowed except through the buy-sell mechanism)
This highly restrictive approach maximizes control over ownership but may be too limiting for some owners' personal financial planning needs. It's most common in closely-held family businesses or partnerships where maintaining specific ownership is critical.
Right of first refusal (owners can sell to third parties, but only after offering the interest to existing owners on the same terms)
This balanced approach gives existing owners the opportunity to maintain their relative control while allowing flexibility if they choose not to purchase. It's the most common approach for its reasonable balance of control and flexibility.
Most Common OptionPermitted transfers with conditions (allowing transfers to specific categories like family members or trusts, with restrictions on all other transfers)
This approach allows flexibility for estate planning and family transfers while maintaining restrictions on outside parties. It's particularly useful for owners who want to incorporate their business interests into their broader estate plan.
The purchase structure determines who has the right or obligation to buy a departing owner's interest. This affects both control over the business and tax implications for all parties involved. For first-time entrepreneurs, the right structure depends on your goals for business continuity, tax planning, and the relationships between owners. Different structures create different dynamics between owners and affect how easily the business can continue operations during ownership transitions.
Cross-purchase agreement (remaining owners personally buy the departing owner's interest)
This structure often has tax advantages for the purchasing owners and keeps the company itself out of the transaction. It works well for businesses with few owners but becomes complicated with larger ownership groups.
Entity-purchase agreement (the company itself buys back the departing owner's interest)
This streamlined approach is simpler to administer, especially with multiple owners, as the company handles the purchase directly. It's the most common structure for its administrative simplicity.
Most Common OptionHybrid agreement (flexibility to choose either cross-purchase or entity-purchase when a trigger occurs)
This flexible approach allows decisions to be made based on the specific circumstances and tax considerations at the time of the triggering event, but adds complexity to the agreement.
Funding mechanisms determine how the remaining owners or the company will pay for a departing owner's interest. Without proper funding, the buy-sell agreement may be practically unenforceable, as the remaining owners might not have sufficient cash available to complete the purchase. For first-time entrepreneurs, establishing a realistic funding approach is essential to ensure the agreement can be executed when needed, particularly in unexpected situations like death or disability.
Insurance funding (life and disability insurance policies on each owner)
This approach provides immediate liquidity for death or disability triggers without straining company finances. It's widely recommended for its reliability and relatively low ongoing cost compared to the protection it provides.
Most Common OptionCompany reserves (setting aside funds specifically for potential buyouts)
This self-funding approach gives you more control but requires discipline to maintain adequate reserves and ties up capital that could otherwise be used for growth or operations.
Installment payments (allowing the purchase price to be paid over time with interest)
This approach reduces immediate financial pressure on the company or remaining owners but extends the financial relationship with departing owners or their estates, which can create ongoing complications.
The valuation method determines how much a departing owner's interest is worth when a triggering event occurs. This is often the most contentious aspect of buy-sell agreements, as it directly affects how much money changes hands. For first-time entrepreneurs, selecting a fair, clear, and practical valuation method is crucial to avoid disputes during already challenging transitions. The right approach balances accuracy with practicality and cost considerations.
Fixed price with periodic updates (owners agree on a specific company value, updated annually)
This straightforward approach is easy to implement but requires discipline to regularly update the valuation, otherwise it can quickly become outdated and lead to unfair outcomes.
Formula-based valuation (using a predetermined multiple of earnings, revenue, or other financial metrics)
This approach automatically adjusts to company performance and is relatively easy to calculate without external assistance. It's popular among small businesses and partnerships for its simplicity and adaptability.
Most Common OptionIndependent appraisal by a qualified business valuation expert
This provides the most accurate and defensible valuation but is also the most expensive and time-consuming option. It's often used for larger or more complex businesses where precision is worth the additional cost.
Triggering events are specific circumstances that activate the buy-sell agreement, forcing or allowing the transfer of ownership interests. These events determine when the provisions of your agreement come into play. For first-time entrepreneurs, it's important to consider both expected transitions (like retirement) and unexpected situations (like death or disability) that could impact business continuity. The more comprehensive your list of triggering events, the better protected your business will be against unforeseen circumstances that could otherwise lead to disputes or instability.
Standard events only (death, disability, retirement)
This basic option covers the most common scenarios that force ownership transitions. It's simpler but provides less protection against other potential situations that could disrupt business operations.
Comprehensive coverage (death, disability, retirement, voluntary departure, divorce, bankruptcy, loss of professional license)
This comprehensive approach addresses nearly all potential scenarios that could affect ownership, providing maximum protection and clarity. Most advisors recommend this approach for long-term business stability.
Most Common OptionCustomized triggers based on specific business concerns (includes standard events plus specific industry or business-related triggers)
This tailored approach allows you to address unique risks in your industry or business model, but requires more careful consideration of potential scenarios specific to your situation.
Family Business Partners
Dispute resolution provisions determine how disagreements about the agreement's interpretation or implementation will be handled. In family businesses, disputes can be particularly emotional and damaging to both business operations and family relationships. Effective dispute resolution mechanisms can prevent lengthy, expensive litigation and help preserve relationships during disagreements.
Mediation followed by binding arbitration if mediation fails
This two-step approach first attempts resolution through a mediator, then moves to binding arbitration if needed. It balances relationship preservation with definitive resolution. Many family businesses choose this option to avoid public litigation that could damage both the business and family relationships.
Most Common OptionFamily business council or board makes final decisions
This internal approach keeps dispute resolution within established business governance structures. It can be efficient but may not be perceived as neutral by all parties. Some well-established family businesses with formal governance structures choose this option to maintain privacy and control.
Traditional litigation in courts
This approach relies on the court system to resolve disputes. It provides formal legal protections but is typically the most expensive, time-consuming, and relationship-damaging option. Few family businesses choose this as their primary dispute resolution method, though it remains available if other methods fail.
These provisions determine whether and how owners can transfer their interests to family members outside the buy-sell process. For family businesses, these provisions are particularly important as they balance keeping the business within the family against ensuring that only qualified, committed individuals become owners. Without clear guidelines, family dynamics can complicate business operations and succession planning.
Permitted transfers to immediate family members with right of first refusal for other owners
This balanced approach allows transfers to close family members but gives existing owners the opportunity to purchase the interest first. It provides flexibility while maintaining some control over ownership. Many family businesses choose this option to balance family succession planning with business continuity concerns.
Most Common OptionUnrestricted transfers to any family members
This flexible approach allows owners to freely transfer interests to any family members without restrictions. It maximizes family succession options but may introduce unqualified or uncommitted owners. Some family businesses choose this option when family cohesion and succession are top priorities over business considerations.
All transfers (including to family) subject to approval by remaining owners
This restrictive approach requires approval from existing owners for any transfer, even to family members. It maximizes control over who becomes an owner but limits succession flexibility. Family businesses with non-family co-owners or concerns about specific family members' business capabilities sometimes choose this option.
Funding mechanisms determine how the remaining owners will pay for the departing owner's interest. Without adequate funding provisions, the business might face severe cash flow problems or the remaining owners might be unable to afford the purchase, potentially forcing a business sale or dissolution. The right funding approach ensures the business can continue operations while fairly compensating departing owners.
Life and disability insurance (for death and disability triggers) with installment payments for other triggers
This hybrid approach uses insurance to fund unexpected departures while allowing structured payments for planned exits. It balances immediate liquidity needs with financial feasibility. Many family businesses choose this option as it provides protection against catastrophic events while allowing flexibility for planned transitions.
Most Common OptionInstallment payments over time for all triggering events
This approach allows the business to pay for the departing owner's interest over several years, easing cash flow concerns. However, it delays full payment to the departing owner or their estate. Some family businesses choose this option when insurance is too expensive or unavailable, or when they have limited cash reserves.
Sinking fund (regular contributions to a reserve account designated for future buyouts)
This proactive approach builds a dedicated fund over time to prepare for future buyouts. It requires discipline and reduces available capital for other business purposes. Family businesses with strong cash flow sometimes choose this option to ensure funds are available without relying on insurance or future business performance.
The valuation method determines how much the departing owner (or their estate) receives for their business interest and how much the remaining owners must pay. This is often the most contentious aspect of buy-sell agreements, as different methods can produce dramatically different valuations. The right approach balances fairness to the departing owner with financial feasibility for the remaining owners and the business itself.
Fixed price with regular updates (owners agree on a value annually)
This straightforward approach requires owners to regularly agree on and document the business value, typically annually. It provides clarity but requires discipline to maintain current valuations. Many family businesses choose this option for its simplicity and because it forces regular discussions about business value.
Most Common OptionFormula method (based on revenue, earnings, or book value)
This approach applies a predetermined formula (such as multiple of earnings or revenue) to calculate business value. It's objective but may not capture intangible value or unusual circumstances. Some family businesses prefer this option when they have stable, predictable financial performance.
Independent appraisal by qualified business valuation expert
This method engages a professional appraiser to determine fair market value when a triggering event occurs. It's considered the most accurate but is also the most expensive and time-consuming. Larger family businesses or those with complex assets often choose this option despite the cost.
Triggering events are specific circumstances that activate the buy-sell agreement, forcing or allowing the transfer of ownership interests. These events define when the agreement's provisions kick in, determining when an owner must or may sell their interest and when other owners must or may buy that interest. Carefully selecting these triggers ensures the agreement protects the business during expected and unexpected transitions. Without proper triggers, owners might be stuck with unwanted partners or face business disruption during critical transitions.
All standard triggers (death, disability, retirement, voluntary departure, divorce, bankruptcy, and involuntary transfer)
This comprehensive approach covers virtually all scenarios that could affect ownership, providing maximum protection for the business and remaining owners. Most advisors recommend this option for family businesses to prevent any gaps in protection.
Most Common OptionLimited triggers (only death, disability, and voluntary departure)
This focused approach addresses the most common transition scenarios while simplifying the agreement. Some family businesses prefer this option when they want flexibility for other situations or plan to address certain events (like divorce) through other legal mechanisms.
Customized triggers with different rules for family vs. non-family owners
This approach creates different transfer rules based on family status, often allowing more flexibility for transfers between family members while restricting transfers to outsiders. This option is popular for multi-generational family businesses that want to keep ownership within the family while still having protection against outside transfers.
Buy-Sell Agreement Requirements
Identify all parties to the agreement
List all current business owners, their ownership percentages, and contact information. Include the legal name of the business entity and its structure (LLC, corporation, partnership, etc.).
Business entity details
Include the business's legal name, entity type, state of formation, principal place of business, and any relevant registration numbers.