phrase
buy-sell agreement
In plain English
A legal agreement among business owners, typically funded by life insurance, that triggers a sale of an owner's interest to the others on death or other triggering event.
Without a buy-sell, when a partner dies, their family inherits their share — and now you're in business with their spouse. Buy-sell agreements use life insurance proceeds to buy out the deceased partner's family at a pre-set valuation.
What it covers
The funding mechanism (life insurance) provides the cash for the surviving owners or the entity to purchase the deceased owner's share. The agreement itself defines triggers, valuation, and terms.
What it does not cover
It is NOT just life insurance. The legal agreement is the structure; the insurance is the funding. Both parts have to be in place.
Where it trips people up
Valuation methods (book, formula, appraisal) drift from reality. Update the valuation method and confirm coverage matches every 2-3 years to keep the funding adequate.
The technical version
A legal agreement among business owners providing for the purchase of an owner's interest upon a triggering event, typically funded by life insurance to ensure liquidity.