A buy-sell agreement is an agreement entered into by business co-owners that will govern what will occur when a business owner 1) dies, 2) is removed, or 3) wishes to sell his/her interest in the business.
In the case of an business owner's death, buy-sell agreements are often funded with life insurance so as to permit the living business owners to purchase the decedent's interest in the business through the business redeeming the decedent's interest, effectively forcing the sale decedent's interest, or through the other business owners offering to purchase such interest.
Buy-sell agreements that are triggered at death and that are funded by life insurance often structure ownership of the life insurance via cross-purchase or entity-purchase.
In buy-sell agreements that require cross-purchase of life insurance, each business owner purchases life insurance policies on the other business owners. In contrast, the entity purchases life insurance policies on each business owner if the agreement calls for entity-purchase of life insurance.
As the number of owners of a business rises, the more impractical cross-purchase arrangements become because of the substantial underwriting costs associated with a large number of separate insurance policies.
The property interest of a business owner whose creditors successfully foreclose upon that interest is often subject to redemption by the corporation per a buy-sell agreement.
Other examples of removal include incapacity, disability, and other similar events.
Buy-sell agreements often require that a business owner first offer to sell his/her interest in the business to his/her co-owners before he/she can sell that interest to a new potential owner.
This brief overview of some important considerations associated with buy-sell agreements is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.