A buy-sell agreement is an arrangement that allows the division of business shares or interest among partners or shareholders in the event that one of the co-owners or shareholders retires, becomes disabled, passes away, or wishes to sell. In the context of insurance, life insurance is often purchased to provide the funds needed to buy the shares that become available.
Buy-sell agreements are generally structured as a cross-purchase or stock redemption plan and serve two main functions. First, it ensures business continuation in case an unfortunate event takes place as the remaining business partners or shareholders can buy the shares of the deceased, retired, or disabled partner. Second, in requiring the involved parties to sell their shares to each other, it prevents an outside party from suddenly gaining a huge stake in the business and potentially altering the way the company is run. Essentially, it functions as a hedge against sudden extreme changes in company leadership and in the corporate power structure.