how a buy and sell agreement works
buy and sell agreements are commonly used by sole proprietorships partnerships and closed corporations in an attempt to smooth transitions in ownership when a partner dies retires or decides to exit the business the buy and sell agreement requires that the business share be sold to the company or the remaining members of the business according to a predetermined formula in the case of the death of a partner the estate must agree to sell to fund the purchase of the shares by the surviving partners life insurance policies are taken out reciprocally by each partner on the lives of the others which can be paid for by the company as a business expense where the partners are the named beneficiaries upon the death of a partner the life insurance death benefit will be paid out to the remaining partners who will use the funds to purchase the deceased s shares from their estate ensuring continuity of the business and its ownership structure having a buy sell agreement avoids costly battles for control with surviving spouses or children and having to use probate court types of buy sell agreementsthere are two common forms of buy sell agreements some partners also opt for a mix of the two with some portions available for purchase by individual partners and the remainder bought by the partnership a wait and see agreement combines elements from each of these two where neither the partners nor the entity is explicitly named at the time when it becomes necessary the agreement will become either one or the other depending on what s best for business continuity 