8 Types of Buy-Sell Agreement Structures for Business Owners

For many business owners, a closely held company represents both a significant financial asset and a core component of long-term planning. A buy-sell agreement is a legal arrangement that outlines how ownership interests may be transferred if certain events occur.

These agreements are commonly used to address situations such as the death, disability, retirement, or voluntary departure of an owner. Establishing a clear structure in advance may help reduce uncertainty, clarify valuation expectations, and support continuity for the business.

This article provides an overview of several common buy-sell agreement structures that may be used in business succession planning.

What Is a Buy-Sell Agreement?

A buy-sell agreement is typically a legally binding contract among business owners that defines how ownership interests may be bought or sold under specific triggering events.

The agreement often addresses several important issues, including:

• Which events trigger a potential ownership transfer

• Who may purchase the departing owner’s interest

• How the value of the ownership interest will be determined

• How the transaction may be financed

Without a defined agreement in place, ownership transitions can become complicated, particularly when family members, surviving partners, or external parties are involved.

Common Events That May Trigger a Buy-Sell Agreement

Buy-sell agreements are often designed to activate when certain events occur that affect an owner’s ability or desire to remain involved in the business.

Typical triggering events may include:

• Death of an owner

• Permanent disability

• Retirement

• Divorce

• Bankruptcy

• Voluntary exit from the company

Addressing these scenarios in advance may help provide clarity for both the business and the owners’ families.

1. Cross-Purchase Agreement

In a cross-purchase agreement, the remaining owners purchase the departing owner’s shares directly.

For example, if one owner leaves or passes away, the other owners buy that individual’s ownership interest based on the terms established in the agreement.

This structure may be easier to administer when there are a small number of owners, but it can become more complex as the number of owners increases.

2. Entity Purchase (Stock Redemption) Agreement

Under an entity-purchase agreement, the business itself buys back the ownership interest from the departing owner or their estate.

The company then retires or redistributes the shares among the remaining owners.

This approach may simplify administration because the business entity manages the transaction rather than requiring individual owners to coordinate purchases.

3. Hybrid Buy-Sell Agreement

A hybrid agreement combines elements of both cross-purchase and entity-purchase structures.

In these arrangements:

• The business may have the first option to purchase the shares

• If the business declines, the remaining owners may have the opportunity to purchase the interest

Hybrid structures are sometimes used to provide flexibility in managing ownership transitions.

4. Wait-And-See Agreement

A wait-and-see agreement allows the parties to determine the buyer at the time the triggering event occurs.

Typically:

1. The business has the first option to purchase the ownership interest.

2. If the business declines, the remaining owners may purchase the shares.

3. If neither party purchases the shares, the agreement may outline alternative outcomes.

This structure can provide flexibility when the future financial circumstances of the business or owners are uncertain.

5. Installment Purchase Agreement

Some buy-sell agreements include installment payment provisions rather than requiring a single lump-sum purchase.

In these arrangements, the buyer may pay for the ownership interest over time according to a predetermined schedule.

Installment structures may make it easier to complete ownership transitions without placing immediate financial strain on the business or remaining owners.

6. Insurance Funded Buy-Sell Agreement

In some cases, life insurance policies are used to help fund buy-sell agreements.

For example:

• Each owner may hold life insurance policies on the other owners.

• If an owner passes away, the policy proceeds may provide liquidity to purchase the ownership interest.

Insurance funding may help address potential cash flow challenges associated with buying out an ownership stake.

7. Disability Buyout Agreement

Disability buyout agreements address scenarios in which an owner becomes permanently unable to continue working in the business.

The agreement may outline:

• How disability is defined

• When the buyout process begins

• How the ownership interest will be valued and purchased

These provisions can help maintain operational stability while ensuring fair treatment for the disabled owner.

8. Right of First Refusal Agreement

A right of first refusal clause may be included within a broader buy-sell agreement.

This provision typically requires that if an owner intends to sell their shares to an outside party, the remaining owners or the company must first be offered the opportunity to purchase those shares under the same terms.

This structure may help preserve control of the company among existing owners.

The Importance of Business Valuation

One of the most critical components of a buy-sell agreement is the valuation methodology used to determine the price of the ownership interest.

Agreements often specify one or more valuation approaches, such as:

• Fixed price updated periodically

• Independent professional appraisal

• Formula-based valuation using financial metrics

Clearly defining the valuation method in advance may help prevent disputes during ownership transitions.

Coordinating Buy-Sell Agreements With Broader Planning

Buy-sell agreements often intersect with other aspects of financial and estate planning.

For example, business owners may coordinate these agreements with:

• Estate planning documents

• Business succession planning strategies

• Life insurance coverage

• Tax planning considerations

Integrating these areas of planning may help align business transition goals with personal financial objectives.

Reviewing Agreements Periodically

As businesses evolve, buy-sell agreements may require periodic review.

Changes that may prompt an update include:

• Addition or departure of business partners

• Significant changes in business valuation

• Changes in tax or regulatory rules

• Shifts in long-term succession plans

Regular review may help ensure that the agreement continues to reflect the owners’ intentions and current business realities.

Final Thoughts

Buy-sell agreements are a foundational element of many business succession plans. By defining how ownership interests may be transferred under specific circumstances, these agreements can help provide clarity for business partners, families, and future owners.

Because buy-sell agreements involve legal, financial, and tax considerations, many business owners work with qualified legal and financial professionals when designing and maintaining these arrangements.

Investment advice offered through Stratos Wealth Partners, Ltd., a registered investment advisor. Stratos Wealth Partners, Ltd. and Parkview Partners Capital Management are separate entities. This material is provided for informational purposes only and should not be considered investment, tax, or legal advice. Individuals should consult their professional advisors regarding their specific circumstances. Past performance is not a guarantee of future results.