Life · Chapter 10 · Business Continuation
Buy-Sell Agreement
Definition
A legal business continuation agreement providing (1) an orderly transfer of the business and (2) money paid to the deceased's survivors at a prearranged price. Life insurance guarantees the cash is there at exactly the moment it's needed. Used by sole proprietorships, partnerships, and closely held corporations.
In plain English
A prenup for business partners: who buys whom out, at what price, with insurance writing the check.
Exam tip
For a SOLE PROPRIETOR it's a two-step plan: the employee agrees to buy the business, then buys a policy on the proprietor's life (employee = owner, payor, AND beneficiary). A partnership legally DISSOLVES when a partner dies — the agreement prevents a forced liquidation sale below fair value.
Easy to confuse with
These are what this term gets tested against — if you can't tell them apart cold, drill the contrast.
Related terms