What is a buy sell agreement?

A buy sell agreement is an important part of many companies’ business plans, as it specifies what will happen if an owner passes away. In general, inheritance laws state that the deceased’s ownership interests automatically pass through the line of succession—most commonly to a living spouse or adult child. Yet this can wreak havoc on a business if the inheritor is not prepared to take on an active ownership role.

A buy sell agreement states that on the death of one owner, the other(s) will buy out that partner’s successor. To ensure that the cash is available for this buyout, it is often funded through life insurance purchased by the company. The death benefit goes to the deceased’s successor, and that portion of ownership is transferred to the remaining owners.

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