10 Things Every Business Owner Should Know Before Creating a Buy-Sell Agreement

Building a business with a partner can be exciting, but you also need to think about what happens when circumstances change. An owner may retire, leave the company, become unable to continue, or pass away. Without an agreed-upon plan, an ownership transition can create uncertainty for the remaining owners, the departing owner’s family, employees, and customers.

A buy-sell agreement can establish a framework for handling an owner’s business interest when certain events occur. It can address how an ownership share is valued, who can purchase it, and how the transaction can be funded. For business owners in Glendale, Pasadena, and surrounding Southern California communities, it can also form part of broader estate and business succession planning.

Before creating one, here are 10 things you should understand.

1. A Buy-Sell Agreement Sets Rules for Ownership Transitions

A business buy-sell agreement is a legal agreement that establishes what happens to an owner’s interest in a business when a specified event occurs.

Think about a business with two owners who have spent years building the company together. Both want the surviving owner to continue running the business if one of them dies. At the same time, the family of the deceased owner may need to receive fair value for that person’s ownership interest.

A buy-sell arrangement can establish a process for addressing both needs.

The agreement can outline:

When an owner’s interest can or must be sold
Who can purchase the ownership interest
How the business interest will be valued
How the purchase will be funded
What happens to the departing owner’s share
How the remaining owners can continue operating the company

The goal is to establish these terms before a triggering event occurs rather than trying to negotiate them during an already difficult transition.

A buy-sell agreement can also be part of broader business succession planning, helping you think ahead about how ownership can change while the company continues operating.

2. You Need to Decide Which Events Can Trigger the Agreement

A buy-sell agreement for businesses in Glendale becomes especially important when you consider the events that could change ownership.

Death is one possibility, but it is not the only one.

Depending on the agreement and the needs of the business, triggering events may include:

An owner’s death
Retirement
Voluntary departure
Disability or inability to continue working
Another agreed-upon change in ownership circumstances

Consider what could happen if one of your partners decides to retire. You may want to purchase that person’s interest, while your partner may want to receive value for the ownership stake they spent years building.

Planning for that possibility ahead of time can give everyone a clearer understanding of how the transition will work.

The same principle applies when an unexpected event occurs. Instead of leaving the remaining owners and the departing owner’s family to determine what happens next, the agreement can provide an established framework.

Think About Your Business Beyond Today

Your company may have two owners today and a different ownership structure several years from now. Your agreement should reflect the circumstances you are actually trying to address.

Ask yourself:

What happens if an owner wants to retire?
What happens if an owner wants to leave voluntarily?
What happens if an owner dies?
Who should have the right to purchase the ownership interest?
How will the remaining owners continue operating the business?

Answering these questions early can make the planning process much more productive.

3. Business Valuation Needs to Be Addressed Upfront

You cannot create an effective ownership transition strategy without considering what the business interest is worth.

The value of your company can change significantly over time. Revenue may increase, assets may change, new customers may be added, or the business may expand into new markets.

For that reason, business owners need to think carefully about how an ownership interest will be valued when the agreement is triggered.

A buy-sell arrangement can establish a value or valuation method for the ownership interest.

Ask These Valuation Questions

Before finalizing your agreement, consider:

How will the business be valued?
Who will determine the value?
How often should the valuation be reviewed?
What happens if the company’s value changes significantly?
Does the current valuation accurately reflect the business?

This matters because an agreement that reflects an outdated business value may not provide the outcome the owners originally intended.

4. Know the Difference Between a Cross-Purchase and Redemption Agreement

Once you understand when a buy-sell agreement may be triggered, the next step is considering how the ownership transfer will actually happen.

Two common structures are cross-purchase agreements and redemption agreements. Both can establish a process for transferring an owner’s interest, but the parties involved in the purchase are different.

Cross-Purchase Agreement

A cross-purchase arrangement involves the business owners purchasing each other’s interests.

Imagine you and a business partner own a company together. You each want the surviving owner to have the opportunity to continue operating the business if the other owner dies.

Under a cross-purchase structure, you and your partner can determine the value of each ownership share and arrange life insurance coverage based on that value. If one owner dies, the surviving owner receives the insurance proceeds and uses them to purchase the deceased owner’s share from the family.

This structure can address two needs at the same time:

The surviving owner has funds to purchase the business interest.
The deceased owner’s family has a source of liquidity for the ownership interest.
The surviving owner can continue operating the business.
The ownership transition follows terms established in advance.

The specific structure and insurance arrangements need to be established based on the business and its ownership.

Redemption Agreement

A redemption agreement takes a different approach.

Instead of individual owners purchasing each other’s interests, the business itself purchases life insurance on its owners. If an owner dies, the company receives the insurance proceeds and uses them to purchase the deceased owner’s business interest from the surviving family members.

The distinction is relatively straightforward:

Cross-purchase: The remaining owners purchase the departing owner’s interest.
Redemption: The business purchases the departing owner’s interest.

Understanding this distinction is important because the structure you choose affects who owns the insurance policies, who receives the proceeds, and who completes the purchase.

5. Decide How the Buy-Sell Agreement Will Be Funded

Creating an agreement is one part of the process. You also need to consider how the purchase will actually be paid for when the agreement is triggered.

Imagine that your business is worth $2 million and you own 50% of it. If you die unexpectedly, your partner may need to purchase your $1 million ownership interest from your family.

Does your partner have $1 million readily available?

If the answer is no, simply having an agreement in place may not solve the financial challenge.

This is where buy-sell agreement funding becomes important.

Life insurance can be used to fund certain buy-sell arrangements. Under a cross-purchase structure, for example, owners may purchase policies on each other based on the value of their respective business interests. Under a redemption arrangement, the business purchases policies on its owners.

The goal is to have financial resources available when they are needed, rather than forcing the buyer to find a large amount of money after an unexpected event.

Consider These Funding Questions

Before finalizing your agreement, ask:

How much is each owner’s interest worth?
How will the purchase be funded?
Who will own the insurance policy?
Who will pay the premiums?
Who receives the insurance proceeds?
Does the coverage adequately reflect the current business value?
What happens if the business value changes?

Funding should be reviewed alongside the agreement itself. If your business grows substantially but the funding arrangement remains based on an old valuation, the available proceeds may no longer match the amount needed for the ownership transfer.

6. Your Buy-Sell Agreement Should Consider the Owner’s Family

Business ownership doesn’t exist in isolation from personal finances.

If you own a business with a partner, your ownership interest may represent a significant part of your personal wealth. It may also form part of the assets your family expects to receive.

That creates an important question: What happens to your business interest if you die?

Without a predetermined arrangement, your family could inherit an ownership interest in a company they don’t operate. At the same time, your surviving partner may want to maintain control of the business rather than suddenly having a new co-owner.

A buy-sell agreement with insurance can establish a process for addressing both sides.

Under a cross-purchase arrangement, for example, the surviving owner can use insurance proceeds to purchase the deceased owner’s share from the family. The family receives liquidity, while the surviving owner can continue operating the business.

This can be particularly important when multiple heirs are involved. A business ownership interest isn’t always easy to divide among family members in a practical way. Cash from a properly structured transaction can provide a more straightforward way to transfer the economic value of the ownership interest.

Think About the Family and the Business Separately

When creating your agreement, consider both objectives:

For the business:

Who should control the company after an owner’s departure?
Can the remaining owners continue operating without major disruption?
How will ownership be transferred?

For the owner’s family:

How will the family receive value for the ownership interest?
Where will the funds come from?
How will multiple heirs be accommodated?
Does the arrangement coordinate with the owner’s broader estate plan?

A thoughtful plan considers these interests before an unexpected event occurs.

Keep the Agreement Connected to Your Broader Planning

Your buy-sell agreement should not exist as an isolated document. Business ownership can intersect with your estate, retirement, insurance, and long-term financial plans.

For example, if your business represents a significant portion of your retirement assets, the way you transfer your ownership interest can affect your eventual retirement strategy. Similarly, your estate plan should account for how your business interest fits into the rest of your assets.

Thinking about these connections early can help you identify gaps before they become problems.

7. Think About Who Can Become an Owner

A business ownership transition can affect more than the person selling their share. It can also change who has control over the company.

Imagine that you have spent years building a business with a partner. If that partner leaves, do you want their ownership interest to automatically pass to someone else? What if that person has no experience with the company or doesn’t share the same vision for its future?

The agreement can establish rules around who may acquire an owner’s interest. This can help remaining owners prevent an unqualified individual from acquiring a stake in the business.

You can use the planning process to discuss:

Who can purchase an owner’s interest
Whether existing owners have the opportunity to purchase the share
What happens if an owner wants to sell voluntarily
How ownership will be transferred after a triggering event
How the transition can minimize disruption to the company

Having these terms established in advance can give everyone a clearer understanding of what happens when ownership changes.

8. Your Agreement Should Reflect Your Business Today

Your business can change considerably over the years. You may add owners, change ownership percentages, increase the company’s value, or significantly expand operations. An agreement that accurately reflected your company several years ago may no longer reflect its current circumstances.

The same applies to the funding supporting the agreement.

For example, if the value of your business has increased substantially but the insurance coverage supporting the agreement is still based on an older valuation, there could be a gap between the amount available and the amount needed for an ownership purchase.

Review These Details Regularly

When reviewing your agreement, look at:

Current business valuation
Ownership percentages
Names of all owners
Triggering events
Purchase terms
Valuation method
Insurance coverage
Policy ownership
Beneficiaries
Funding arrangements

A review can also give you an opportunity to address changes in your personal circumstances.

Your estate plan may have changed. Your retirement goals may have changed. Your business may have grown. Each of these changes can affect how your ownership transition should be structured.

9. Coordinate the Agreement With Your Estate and Financial Plans

Your business may be one of your most valuable assets, so your ownership interest shouldn’t be considered separately from the rest of your financial plan.

A buy-sell agreement can work alongside estate planning, life insurance, retirement planning, and other financial strategies.

For example, if your business represents a significant portion of your wealth, you may need to consider what happens to that value when you retire or when your ownership interest passes to your family.

The agreement can establish a process for transferring the business interest, while your broader estate plan can address how the resulting assets fit into your overall estate.

Consider How These Plans Connect

Estate planning: Your business interest may be part of your estate and should be considered alongside your other assets.
Life insurance: Insurance may provide funding for certain buy-sell arrangements, particularly when an owner’s death triggers the agreement.
Retirement planning: If you expect the business to contribute to your retirement income, your ownership transition strategy can become part of your retirement planning.
Business exit planning: If you eventually plan to leave the company, the ownership transition may need to be considered well before your planned departure.
Financial planning: Your business, personal assets, insurance coverage, and retirement savings can all contribute to your broader financial picture.

Thinking about these areas together can help you identify gaps that might be overlooked when each plan is created separately.

10. Don’t Create the Agreement and Forget About It

Creating a buy-sell agreement is an important step, but it should not be treated as a document you sign once and never revisit.

Your business can change significantly over the years. The value of the company may increase, ownership percentages may change, a new partner may join, or an existing owner may decide to retire. Your insurance coverage and funding arrangements may need to change along with those circumstances.

What Should You Review?

During a periodic review, look at:

Business valuation: Does the current value still reflect the company?
Ownership percentages: Do the percentages in the agreement match the current ownership structure?
Triggering events: Does the agreement address the situations you want it to cover?
Purchase terms: Are the terms still practical for the owners?
Funding: Is there enough funding to support the planned purchase?
Life insurance coverage: Does the coverage still correspond with the value of the ownership interests?
Ownership of policies: Are the policies structured consistently with the agreement?
Family and estate considerations: Do the arrangements still align with each owner’s broader plans?

A review can also be appropriate after major changes such as bringing in a new partner, selling part of the company, experiencing significant growth, or changing your long-term exit plans.

A Buy-Sell Agreement Checklist for Business Owners

Before creating or reviewing your agreement, sit down with your co-owners and consider these questions:

Ownership

Who currently owns the business?
What percentage does each owner hold?
Who should be allowed to purchase an owner’s interest?

Triggering Events

What happens if an owner dies?
What happens if an owner becomes disabled?
What happens if an owner retires?
What happens if an owner voluntarily leaves?

Valuation

How will the business be valued?
How will each owner’s interest be valued?
How frequently should the valuation be reviewed?

Funding

How will the purchase be financed?
Will life insurance be used?
Who will own the policies?
Who will receive the proceeds?

Family and Estate

What happens to an owner’s interest after death?
How will the owner’s family receive value for that interest?
Does the agreement coordinate with the owner’s estate plan?

Long-Term Planning

Does the agreement support your eventual business exit?
Does it fit with your retirement goals?
When should the agreement be reviewed again?

Working through these questions before an agreement is finalized can help you identify areas that need further discussion with your legal, financial, tax, and insurance professionals.

How a Buy-Sell Agreement Fits Into Your Long-Term Business Plan

A buy-sell agreement is one part of a broader business transition strategy.

It can establish a market and price for an ownership interest that might otherwise be difficult to sell, provide a framework for ownership changes, and help remaining owners prevent an unwanted person from acquiring an interest in the company. It can also help reduce potential disruption when an owner leaves the business.

For you, that means thinking beyond the question of “What happens if I die?”

You should also consider:

What happens when I retire?
How will I eventually leave the business?
How much is my ownership interest worth?
How will that value contribute to my retirement?
What happens to my family if I leave unexpectedly?
How will the remaining owners fund the purchase?
Does my estate plan account for my business interest?

You don’t want your partners and family trying to figure out the future of the business during a difficult transition.

Creating an agreement while all owners are involved gives you an opportunity to discuss ownership, valuation, funding, and transition terms in advance. It also gives you a framework that can be reviewed as the company evolves.

The agreement should reflect the business you have today while giving you a process for addressing the changes that may come tomorrow.

Plan Your Business Ownership Transition With Legacy Partners

If you’re a business owner in Glendale, Burbank, Pasadena, Beverly Hills, Sherman Oaks, or surrounding Southern California communities, Legacy Partners Insurance can help you explore strategies for protecting your business and planning for future ownership transitions.

Its business and financial services include:

A business you’ve spent years building deserves a plan for what happens when ownership changes. Start the conversation while you have time to consider your options and coordinate your business, financial, and estate planning goals.

FAQs

1. What is a buy-sell agreement?

A buy-sell agreement establishes rules for transferring an owner’s interest in a business when certain events occur, such as death, retirement, disability, or voluntary departure.

2. When should a business create a buy-sell agreement?

Ideally, business owners should discuss a buy-sell agreement while all owners are actively involved in the company. Creating the agreement in advance allows owners to establish valuation, ownership, triggering events, and funding terms before a transition occurs.

3. What events can trigger a buy-sell agreement?

Common triggering events can include an owner’s death, retirement, disability, or voluntary departure. The specific events covered depend on the terms established by the business owners.

4. How is a business valued for a buy-sell agreement?

The agreement can establish a valuation method for determining the value of an owner’s interest. Business owners should also review the valuation periodically because the company’s value can change over time.

5. What is a cross-purchase agreement?

A cross-purchase agreement allows the remaining business owners to purchase the departing or deceased owner’s interest. Life insurance can be used to provide funds for the purchase in certain arrangements.

6. What is a redemption agreement?

A redemption agreement allows the business itself to purchase an owner’s interest. In certain arrangements, the company purchases life insurance on its owners and uses the proceeds to help fund the purchase following a triggering event.

7. Can life insurance fund a buy-sell agreement?

Yes. Life insurance can be used to fund certain buy-sell arrangements. The structure determines who owns the policies, who pays the premiums, who receives the proceeds, and how those proceeds are used.

8. What happens if a business doesn’t have a buy-sell agreement?

Without an established agreement, the owners and their families may have to determine how an ownership interest will be transferred after a triggering event. This can create uncertainty around valuation, ownership, control, and funding.

9. How often should a buy-sell agreement be reviewed?

The agreement should be reviewed when significant changes occur and periodically as part of ongoing business planning. Changes in business value, ownership, insurance coverage, or retirement and exit plans may require updates.

10. How does a buy-sell agreement fit into business exit planning?

A buy-sell agreement can form part of a broader business exit strategy by establishing how an owner’s interest can be transferred. It can be coordinated with retirement planning, estate planning, life insurance, and other financial strategies.