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Learn how buy-sell agreements can support smooth business transitions, reduce conflict, and align ownership changes with your long-term planning goals.
What Every Business Owner Needs to Know About Buy-Sell Agreements
Transitions are an inevitable part of owning a business—but they don’t have to be disruptive. A well-crafted buy-sell agreement can provide direction, reduce uncertainty, and likely help protect the long-term value of your company.
Whether you’re planning for retirement, navigating a change in ownership, or preparing for the unexpected, a buy-sell agreement helps define what happens next—and who’s responsible for making it happen.
Here’s what every business owner should know about buy-sell agreements:
- Buy-sell agreements can help support smoother ownership transitions, reduce the risk of conflicts or legal disputes, preserve internal control over who may hold ownership interests, and clarify expectations around valuation and funding.
- Without a clearly defined agreement in place, disagreements among heirs, partners, or co-owners may arise, introducing uncertainty and potentially disrupting the continuity of the business.
- There’s no one-size-fits-all structure—the right agreement depends on your ownership model, succession goals, and financing preferences.
- Agreements require regular review—as your business grows or changes direction, your buy-sell agreement should evolve to stay relevant.
- Coordinating with financial, legal, and tax professionals can help align your agreement with broader succession planning and estate strategy.
Buy-sell agreements are especially important for closely held or family-owned businesses, where personal relationships and business decisions are often closely intertwined. At EP Wealth, we help owners take informed steps to prepare for the future through personalized business planning services.
Back to Basics: What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract that outlines how ownership interests in a business may be transferred when a defined event occurs. These agreements typically come into play when an owner exits the company, whether by choice or due to unforeseen circumstances.
Common triggering events may include:
- Death or permanent disability of an owner
- Retirement or voluntary departure
- Divorce or bankruptcy
- Deadlock among owners
- Legal or financial complications
Common Types of Buy-Sell Agreements
The structure of your agreement should align with your ownership model and long-term goals. Here are the three most common formats, each with different implications for taxes, financing, and ownership control.
Cross-Purchase Agreement
Each owner agrees to buy the departing owner’s interest. This structure is often used for businesses with a small number of partners.
Redemption Agreement
The business itself agrees to repurchase the ownership interest. This option can simplify funding logistics but may affect the company’s financials.
Hybrid (Wait-and-See) Agreement
A flexible structure that allows the company or co-owners to decide who will purchase the interest after a triggering event occurs.
Components to Address
Crafting a strong buy-sell agreement involves more than outlining who buys what. Consider incorporating the following elements:
These details form the foundation of a well-structured agreement and are best developed with input from your financial, legal, and tax advisors.
Funding Strategies for Buyouts
How a buy-sell agreement is funded can be just as important as the terms themselves. Common strategies include:
- Life Insurance: Policies can be used to fund buyouts in the event of an owner’s death.
- Disability Insurance: This may help fund the buyout if an owner becomes permanently disabled.
- Company Cash Flow: Businesses may allocate retained earnings or working capital to cover ownership purchases.
- Bank Financing: Loans or lines of credit may provide liquidity when needed.
- Installment Payments: Spreading payments over time may ease the financial burden on the company or remaining owners.
Each option involves trade-offs in cost, taxation, and operational impact. Business owners can partner with an EP Wealth financial planner to explore which approach best aligns with their current situation and long-term goals.
Challenges That May Arise
Even a well-structured buy-sell agreement may require ongoing attention as a business evolves. Business owners can encounter challenges such as disagreements over valuation, coordination difficulties among multiple owners with different goals, and family dynamics that influence key decisions.
Also, tax considerations may impact the timing or cost of ownership transfers, and older agreements may become outdated as the company grows or changes direction. Periodic reviews and collaboration with financial, legal, and tax professionals can help address these issues and keep the agreement aligned with the current needs of the business.
Timing Considerations
There’s no universal rule for when to create a buy-sell agreement, but establishing one early—ideally before any ownership transitions are on the horizon—can be a proactive step. Here are some suggested times you might want to create or review a buy-sell agreement:
- At the formation of a new partnership or business entity
- When bringing on a new owner, shareholder, or partner
- Before a planned retirement or ownership exit
- Following a major change in business valuation or revenue
- After a merger, acquisition, or business restructuring
- In response to a partner’s illness, disability, or change in personal circumstances
- During regular business planning or succession strategy reviews
At EP Wealth, we work with business owners to help them take a thoughtful approach to ownership transitions. Our business planning advisors collaborate with legal and tax professionals to support the development of buy-sell agreements that reflect your company and personal priorities.
Connect with an advisor near you to get started.
DISCLOSURES
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- The need for a business planning advisor or financial planner and/or the type of services required are specific to the uniqueness of each individual’s circumstances. There is no guarantee or warrantee that the services offered by EP Wealth Advisors, LLC will satisfy your specific financial services requirements. Services offered by other advisors may align more to your specific needs.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
- Laws vary by state. The information presented herein is intended to be general in nature and may not apply to your state of domicile. Please consult local legal counsel to determine the best practices for your state.
