A buy-sell agreement, also called a buyout agreement, is a contract among a business’s owners that sets what happens to an owner’s interest when a trigger occurs, such as death, disability, retirement, or divorce. It names who can or must buy, how the price is set, and how the buyout is paid.
This is general information, not legal, tax, or insurance advice. Buy-sell agreements have tax and valuation consequences that depend on your entity and state, so work with an attorney and a CPA.
What is a buy-sell agreement?
A buy-sell agreement is a contract that controls the sale of an owner’s interest in a business, either to the other owners or to the company, when a defined event occurs. It can be a stand-alone document or a clause inside an operating, partnership, or shareholder agreement. Its purpose is to avoid disputes and surprises when ownership changes.
The Tax Adviser describes it as a contract between the members of an LLC that provides for the sale, or offer to sell, of a member’s interest to the other members or to the LLC when specified events occur (The Tax Adviser). A Pennsylvania firm summarizes the goal as preventing deadlock, valuation fights, and unintended transfers when retirement, death, disability, divorce, or conflict occurs, and notes the terms are often built into the operating or shareholder agreement (Lebovitz Law).
How does a buy-sell agreement work, and what triggers a buyout?
The agreement lists triggering events, says who must or may buy the departing owner’s interest, sets how the price is determined, and states how and when it is paid. When a trigger occurs, the process runs on those terms instead of being negotiated under pressure. Some triggers require a sale, and others give an option.
| Trigger | Typical treatment | Common funding |
| Death | Often a mandatory sale by the estate and purchase by the buyer | Life insurance |
| Disability | Buyout after a defined disability period | Disability buyout insurance or installments |
| Retirement | Often an option to sell and purchase | Installment payments or business cash flow |
| Divorce | A purchase right or defined process for the affected interest | Cash or installment note |
| Bankruptcy or expulsion | Right or obligation to purchase at a set price or formula | Company reserves or financing |
| Voluntary exit or deadlock | Buy-out rights or a defined process | Cash, notes, or financing |
Sources list common triggers as death, disability, retirement, and divorce (The Tax Adviser), with bankruptcy and voluntary sale added by a Texas firm (Wallace Law), and a CPA firm’s table treats death as a mandatory sale and retirement as an option, with life insurance and installment payments as funding sources (HSC CPA).
What are the types of buy-sell agreements?
There are three main structures. In a cross-purchase agreement, the remaining owners buy the departing owner’s interest. In an entity-purchase or redemption agreement, the company buys it. A hybrid lets the company or the owners choose at the time. The choice affects taxes, insurance ownership, and administration.
| Structure | Who buys | Considerations |
| Cross-purchase | The remaining owners | In a funded plan each owner buys insurance on the others; may suit two or three owners |
| Entity purchase (redemption) | The company | The company owns one policy per owner; simpler for larger groups, with the tax issues described below |
| Hybrid | The company or the owners, by choice | Flexible but more complex to draft |
The Tax Adviser says a buy-sell is generally structured as a cross-purchase agreement between individual members, where each member buys life insurance on every other member, or as a redemption agreement between the members and the LLC (The Tax Adviser). A financial planning firm adds that an entity purchase simplifies insurance because the entity owns one policy per owner, while cross-purchase suits two or three owners (Chesapeake Financial Planning). A hybrid combines both (HSC CPA).
How is the buyout price set?
The agreement sets the price by a method chosen in advance: a fixed price per unit, a formula, or an independent appraisal at the time of the trigger. Each has trade-offs. A fixed price is simple but goes stale, a formula can be distorted by short-term decisions, and an appraisal is accurate but slow and costly.
The Tax Adviser lists a fixed price per unit, an independent appraisal, or a formula approach such as a multiple of earnings or book value (The Tax Adviser). Wolters Kluwer notes that a fixed price often is not updated (Wolters Kluwer), and an LLC guide recommends a hybrid: a formula as the starting point, with an appraisal as a backstop when members disagree (McFarland Group). Whatever you choose, schedule regular updates so the number reflects the business.
How is a buy-sell agreement funded, and what does life insurance change?
Common funding sources are life insurance, disability buyout insurance, installment notes, and a sinking fund. Life insurance provides immediate cash on death, which is why many agreements use it. After the Supreme Court’s 2024 Connelly decision, however, how the policy is owned can change the estate tax value of the business.
In Connelly v. United States, the Court held that a corporation’s contractual obligation to redeem shares is not necessarily a liability that reduces the corporation’s value for federal estate tax purposes, and that life insurance proceeds payable to the corporation are an asset that increases its value (Connelly v. United States, 602 U.S. 23-146). In that case, the estate had reported the shares at $3 million, the redemption price, while the IRS counted the $3 million of insurance proceeds in the company’s value. A law firm commentary says a cross-purchase agreement or a separate life insurance entity might have avoided paying the proceeds to the company (Lindabury).
Moving existing policies to the owners is not a simple fix. One firm warns that transferring life insurance ownership under a cross-purchase arrangement can trigger the transfer-for-value rules under the Internal Revenue Code, which can make proceeds taxable income (Manning Fulton). If your agreement uses life insurance, a buy sell agreement life insurance review with an attorney and CPA is worth doing now.
What is different about a buy-sell agreement for an LLC?
An LLC buy-sell agreement works the same way, but it often lives inside the operating agreement as buyout provisions, and it should match the operating agreement’s transfer restrictions. Members, not shareholders, are the parties, and the LLC may be taxed as a partnership, which affects how a buyout is treated.
Wolters Kluwer notes that if you operate an LLC, a buy-sell agreement may be a provision within your operating agreement, and that an operating agreement may provide that an owner cannot withdraw except by unanimous consent or on other conditions (Wolters Kluwer). The Tax Adviser’s guidance focuses on LLC buy-sell agreements and the valuation of members’ interests (The Tax Adviser). Make sure the two documents do not contradict each other, and ask an accountant how a buyout will be taxed for your entity.
What should a buy-sell agreement template include?
A buy-sell agreement template should cover the parties and ownership, the triggering events, who may or must buy, the valuation method and update schedule, funding and payment terms, restrictions on transfers, dispute resolution, and signatures. Treat any template as a starting point to tailor with an attorney.
| Clause | What it should say |
| Parties and interests | Each owner and the percentage or units they hold |
| Triggering events | Death, disability, retirement, divorce, bankruptcy, voluntary sale, and deadlock, and whether each is mandatory or optional |
| Purchaser and priority | Who has the first right to buy, and what happens if they decline |
| Valuation | Fixed price, formula, or appraisal, with who pays for the appraiser and how often the value is reviewed |
| Funding and payment | Insurance, installment notes, or reserves, and the timing of payments |
| Transfer restrictions | Rules on selling to outsiders, pledges, and spousal consent |
| Disputes and law | Mediation or arbitration steps and the governing state law |
| Signatures | Every owner, and spouses if the agreement requires their consent |
BlueNotary’s form templates page offers free downloadable templates in PDF, Word, or Google Docs formats, and its business agreement contract template is a related general template. Neither is a buy-sell agreement tailored to your business, so use them only as formatting references and have an attorney draft the buy-sell terms.
Does a buy-sell agreement need to be notarized?
Usually not. Business contracts typically do not need to be notarized or witnessed to be legally binding, but notarizing verifies each signer’s identity and can help if someone later disputes a signature. Banks, lenders, and investors may ask for notarized signatures, so check before signing.
FindLaw says business contracts typically do not need to be notarized or witnessed to be binding, and that a notarized contract can help prove that a party who objects was the person who signed (FindLaw). A notary service blog adds that a buy-sell agreement rarely needs notarization at signing, but related documents, such as membership interest assignments, often do once a bank, lender, or investor is involved (US Online Notaries).
On BlueNotary, owners in different places can notarize online: upload the unsigned PDF, add each signer, verify identity, and sign on video. See its signer instructions, last updated July 14, 2026, the identity guide, and the multiple-signer process. If you only need signatures, BlueNotary’s eSign can collect them. One notarization with one stamp is $25, each additional signer is $5, each additional stamp is $8, and a witness is free if you bring one and $10 if BlueNotary provides one (checked October 2026, fee schedule). Three owners with one stamp would be $35 (hypothetical total). See the pricing page and the remote online notarization page.
Agreement ready to sign? Notarize Your Business Agreement Online with BlueNotary.
FAQs
1. What is the difference between a buy-sell agreement and a buyout agreement?
They usually mean the same thing. A buyout agreement is another name for a buy-sell agreement, a contract that sets when and how an owner’s interest is bought.
2. When should you create a buy-sell agreement?
Early, ideally when the business is formed or when a new owner joins. Setting terms before a trigger occurs avoids negotiating under pressure and arguing about value.
3. Do I need life insurance to fund a buy-sell agreement?
No. Life insurance is common for death triggers, but agreements can also use installment notes, reserves, or financing. Ask an advisor how Connelly affects company-owned policies.
4. Can a buy-sell agreement be changed?
Yes, if all owners agree and the agreement allows it. Review it regularly, especially the price, since a stale fixed price can cause disputes.
5. Is a buy-sell agreement the same as an operating agreement?
No, but an LLC’s buy-sell terms are often written into its operating agreement. A separate buy-sell agreement can also sit alongside it.
