According to a March 2025 Gallup survey, fewer than one in three small-business owners have a documented exit plan. Most own businesses worth hundreds of thousands of dollars. Most have no legal framework for what happens when they die, get sick, or retire. That is the gap a buy-sell agreement fills. And that gap is widening fast.
EOD operators know: the device you didn't sweep for is the one that kills you. Business owners spend years building something real, then leave the most dangerous moment, completely unplanned.
What Is a Buy-Sell Agreement?
A buy-sell agreement is a legally binding contract between co-owners of a business that determines what happens to an ownership stake when one of them leaves. The trigger can be death, permanent disability, retirement, divorce, or voluntary departure. The agreement specifies who can buy the departing owner's interest, at what price, and how the purchase gets funded.
Think of it as a business prenuptial agreement. You create it before anyone wants to leave. The terms are set when the relationship is functional, not during a crisis.
Per Cornell Law School's Legal Information Institute, buy-sell agreements are limits placed on ownership rights of closely-held organizations that require shares be resold to the organization or current partners when an owner decides to leave or passes away. Partnerships, LLCs, and closed corporations use them most. They are the mechanism that prevents a deceased owner's spouse or estate from suddenly becoming your new business partner.
Why This Matters Now
The United States is entering what McKinsey calls the Great Ownership Transfer. A February 2026 McKinsey Institute report estimates that by 2035, approximately six million small and medium-sized businesses will face ownership transitions as baby boomers retire. More than one million of those firms are viable candidates for sale, representing up to $5 trillion in enterprise value.
Today, more than half of all small-business owners in the United States are over the age of 55. One in four is 65 or older. Many built companies from nothing. Most have the bulk of their net worth tied up in those companies. And most have no legal structure governing what happens when they step away.
A Washington University and Brookings Institution policy paper found that over 85 percent of business owners aged 55 and older lack a formal succession plan, a figure confirmed nationally by the Exit Planning Institute's 2023 Owner Readiness Report.
Without a buy-sell agreement, the exit that should fund retirement becomes a legal dispute or a forced liquidation. The Silver Tsunami is not a distant problem. It is already underway, and the businesses with no succession framework are the ones most at risk of disappearing entirely rather than transferring to a qualified buyer.
Three Types of Buy-Sell Agreements
Understanding the structure matters before signing anything. There are three main forms, and each has different ownership and tax implications.
Cross-purchase agreement: Each remaining owner buys a proportional share of the departing owner's interest. If three partners each own a third and one dies, the other two each buy half of the deceased's stake. This is straightforward in small partnerships. It becomes administratively complex when there are many co-owners, because each owner needs a separate life insurance policy on every other owner.
Entity-purchase (redemption) agreement: The business itself buys the departing owner's interest rather than the individual co-owners. The company is the purchaser, typically funded by a life insurance policy the business holds on each owner. Simpler administratively when there are multiple owners, but the tax treatment differs from cross-purchase agreements. The remaining owners do not get a step-up in tax basis on the acquired shares under this structure.
Wait-and-see (hybrid) agreement: Neither structure is pre-committed. When a triggering event occurs, the parties decide at that point whether the company or individual owners will purchase the departing interest. Flexible, but it requires goodwill at a moment when emotions often run high.
As Investopedia explains, the right structure depends on the number of owners, the business entity type, and tax planning goals. A business attorney and a tax advisor should both weigh in before signing.
Trigger Events That Activate the Agreement
A well-drafted buy-sell agreement covers more than death. The trigger events typically include death, permanent disability, retirement, voluntary departure, termination for cause, bankruptcy, and divorce. Each trigger requires its own provisions.
Retirement is the most common trigger for businesses owned by the Silver Tsunami generation. The agreement should specify what notice period is required, how the valuation will be conducted, and the payment terms the departing owner will receive. Without those provisions, retirement becomes a negotiation rather than an orderly transfer.
Divorce is often overlooked. When a co-owner divorces, a family court may assign the ownership interest to the spouse as a marital asset. Without an agreement, a business partner you never chose can end up at your table. A properly drafted agreement prevents that by requiring any forced transfer to go back to the company or remaining owners at the agreed valuation.
Valuation: The Most Contested Clause
The valuation method embedded in the agreement determines how much a departing owner gets paid. This is where most disputes originate when there is no pre-agreed formula.
The three most common valuation approaches in buy-sell agreements are fixed price (a number set at signing and revisited annually), formula-based (a multiple of EBITDA or revenue, often reflecting industry norms), and appraisal (a third-party valuation conducted at the time of the triggering event). Each has trade-offs.
Fixed price is simple but becomes outdated quickly. A business worth $1.2 million at signing may be worth $3.5 million five years later. Formula-based valuation reflects current performance but requires calibration to your industry. Lower-middle-market service businesses typically trade at 3x to 5x EBITDA. Appraisal-based valuation is the most accurate but the slowest, which creates cash flow problems for surviving partners when the triggering event is sudden.
The business succession plan and the buy-sell agreement should be drafted together so the valuation methodology aligns with how the business is being built and positioned for eventual sale.
Funding the Buyout
A buy-sell agreement is a promise. The funding mechanism is what makes the promise executable. The three most common funding approaches are life insurance, installment payments, and third-party financing.
Life insurance: The most common approach for death-triggered buyouts. Each owner's life is insured for the value of their ownership stake. When they die, the death benefit provides the cash to execute the buyout without forcing the business to liquidate assets or take on debt. Nolo notes that for partnerships and closely-held corporations, requiring immediate cash payment can prevent even a successful company from executing a buyout. Insurance eliminates that constraint.
Installment payments: Common for retirement-triggered buyouts where the owner is alive and the business needs time to generate the cash. The departing owner receives a down payment of 20 to 30 percent, with the balance paid over three to five years at a negotiated interest rate. This approach functions similarly to a seller note in an acquisition, which any experienced buyer understands.
Third-party acquisition: The buy-sell agreement may allow the departing owner to sell to an outside party after offering the interest to current owners first under a right of first refusal. This is where private equity and strategic acquirers enter the picture. A business with a clean agreement and clear valuation is significantly easier to acquire than one where ownership rights are undefined.
What Happens Without One
The absence of a buy-sell agreement does not mean nothing happens. It means state law determines the outcome instead of you. And state law was not written with your specific business in mind.
When an owner dies without an agreement, their ownership interest passes to their estate and then to their heirs. Those heirs may have no interest in the business, no relevant skills, and no patience for a structured buyout. They may demand immediate liquidity the surviving partners can't provide. The forced sale that results rarely achieves full value.
The baby boomer business exit planning challenge is not just about finding a buyer. It is about having the legal infrastructure in place so that when a triggering event occurs, the transition is orderly rather than chaotic. A buy-sell agreement is that infrastructure.
What Acquirers Look For
When PGC evaluates a lower-middle-market business for acquisition, the buy-sell agreement is one of the first documents reviewed. It tells us whether ownership is clean, whether the valuation reflects market reality, and whether co-owners hold competing rights that could complicate a transaction.
A business with a well-drafted, current buy-sell agreement signals that the owner thought ahead. It suggests the financials are organized, the ownership is properly documented, and the exit process was planned. That reduces deal risk and often translates to a better valuation and a faster close.
A business with no agreement, or one that hasn't been updated in a decade, introduces uncertainty. Untangling ownership rights before pricing a deal takes time, costs money, and sometimes kills transactions that should have gone through. If you are planning an exit in the next three to ten years, the buy-sell agreement is not a legal formality. It is deal infrastructure. Get it in place now, while the business is healthy and the relationships are functional.
Frequently Asked Questions
What is the difference between a buy-sell agreement and a succession plan?
A buy-sell agreement is a legal contract governing who can purchase an owner's interest and at what price when they leave. A succession plan is a broader strategic document covering leadership transition, operational continuity, and long-term ownership structure. A complete exit strategy includes both. The buy-sell agreement handles the legal and financial mechanics of ownership transfer. The succession plan handles the business continuity and leadership development that make the transfer viable.
How often should a buy-sell agreement be updated?
At minimum, every three years. More frequently if the business has grown significantly, if ownership percentages have changed, or if any partner's personal situation has changed materially. A fixed price valuation becomes dangerously outdated within a few years in a growing business. A formula-based valuation should be reviewed whenever the business model or industry comps shift. Treat the buy-sell agreement like your business insurance: worth reviewing annually and updating whenever something material changes.
Does a solo business owner need a buy-sell agreement?
A true solo owner with no co-owners does not need a traditional buy-sell agreement, which governs relationships between multiple owners. However, a sole proprietor or single-member LLC may still benefit from a documented succession agreement that names a business successor, establishes a valuation methodology for estate purposes, and provides instructions for disposition in the event of death or disability. The instrument may be called something different, but the planning imperative is the same: decide now, before someone else is forced to decide for you.
