Kevin Dick
Posted on Jun. 26, 2026
Introduction
Picture this scenario.
Partner A and Partner B share 50/50 ownership in an HVAC business they’ve grown into a $5 million company over 20 years. They started with one van and two employees. Today they have a fleet of trucks, a full office staff, and a reputation built on decades of reliable service. Then, without warning, Partner A passes away suddenly.
Because the two partners did not put a buy-sell agreement in place, Partner A’s 50% stake in the company automatically passes to his wife, a stay-at-home spouse with no background in the HVAC profession. She’s never quoted a job, managed a crew, or read a balance sheet.
Now Partner B is running a company he only half-owns, alongside someone with no operational role and no clear path to buying her out. He doesn’t have $2.5 million sitting around; most of his net worth is tied up in the business itself. Meanwhile, Partner A’s wife is grieving and stuck holding an illiquid interest in a business she never asked to be a part of. Neither of them has good options.
Buy-and-sell agreements are designed to prevent exactly this type of outcome. In this article, we’ll walk through how these agreements are structured and funded, as well as why every business owner with one or more partners should have one.
What Is a Buy-Sell Agreement?
A buy-and-sell agreement is a legally binding contract that dictates what happens to an owner’s share of a business when they die, become disabled, retire, or otherwise exit the company. Its purpose is to ensure business continuity by defining who’s allowed to purchase the departing partner’s interest, at what value, and under what circumstances, guaranteeing that the proper stakeholders maintain control of the business.
Life insurance is commonly used to fund the buyout in the event of a partner’s death. However, when a partner departs for other reasons (disability, retirement, etc.), other funding mechanisms come into play.
Triggering events are conditions that activate a buy-sell agreement. Common examples include:
- Death
- Disability
- Retirement
- Divorce
- Insolvency
- Loss of a professional license
- Criminal conviction
The specific triggers depend on how each agreement is constructed. Also, buy-sell agreements aren’t limited to only two partners; it’s common for the agreement to include three or more owners.
Types of Buy-Sell Agreements
Buy-and-sell plans generally take one of three forms:
- Cross-Purchase Agreements – Each business partner purchases a life insurance policy on every other partner. In the event of a partner’s death, the surviving owners use the insurance proceeds to acquire the departing owner’s shares directly.
- Entity-Purchase Agreements – The business entity itself purchases a life insurance policy on each partner and uses the proceeds to acquire the deceased partner’s share of the business. If a partner leaves for reasons other than death, the business will acquire the departing partner’s interest using other funding methods.
- Wait-and-See Agreement – A hybrid approach that combines elements of both types. When a triggering event occurs, the agreement converts into whichever structure makes the most sense for business continuity at that time.
For the following examples, assume the partners have adopted a wait-and-see agreement as their buy-sell plan.
Example 1: A Partner Dies
Referencing our earlier example, assume the partners agreed that in the event of death, the buy-sell converts to a cross-purchase structure. This means that each partner has purchased a $2.5 million life insurance policy on the other. Here’s how Partner A’s death would be handled:
- Partner A’s ownership interest passes to his estate.
- The insurance proceeds are paid directly to Partner B.
- Partner B uses the proceeds to purchase Partner A’s interest from his estate.
- In return for the cash, Partner A’s executor transfers the business interest to Partner B.
- Partner B becomes 100% sole owner of the company.
Example 2: A Partner Becomes Disabled
If Partner A becomes disabled rather than deceased. Per the buy-sell plan, the entity-purchase agreement now comes into play. Here’s a typical sequence of events if an owner becomes disabled:
- Partner A continues to receive his full salary for one year.
- At the end of the year, the business purchases Partner A’s ownership interest with a 10% down payment paid directly to Partner A (the cash value of life insurance policy can help fund this).
- The business carries a promissory note for the remaining balance and makes interest payments over time.
- With Partner A’s business interest acquired by the entity, Partner B’s 50% stake becomes the only remaining ownership, making him the effective 100% owner.
- The business services the note over the following 10 years, until it’s paid in full or another triggering event occurs.
Example 3: A Partner Retires
Now let’s assume Partner A decides to retire early. A retirement scenario plays out nearly identically to the disability scenario, with one difference: the business has no obligation to pay Partner A year’s salary before the buyout begins, since retirement doesn’t carry the same extenuating circumstances as a disability:
- The business purchases Partner A’s ownership interest with a 10% down payment (again, the cash value of life insurance policy can assist).
- The business carries a note for the remaining balance and pays interest over time.
- Partner B becomes effective 100% owner.
- The note is serviced over the next 10 years or until the next triggering event.
Pros and Cons of Buy-Sell Agreements
Pros
- Ensures business continuity when an owner exits
- Establishes a clear, pre-agreed valuation method, reducing the risk of disputes
- Protects the remaining owners from being forced into a partnership with an unintended third party (a spouse, heir, or outside investor)
- Provides liquidity for the departing owner’s estate
Cons
- Requires ongoing maintenance, meaning valuations and insurance coverage should be reviewed regularly as the business evolves
- Cross-purchase agreements can be administratively complex with multiple partners (three owners means six policies)
- If the business is underinsured at the time of a triggering event, the buyout may be underfunded
Disability and retirement buyouts rely on installment payments, which can strain cash flow if not properly planned for
Final Thoughts
No one starts a business thinking about what happens when a partner dies, gets hurt, or walks away. But the business owners who plan for those moments are the ones who protect everything they’ve built. The time to put one in place is before you need it.
A well-structured, properly funded buy-sell agreement gives the business and every stakeholder a clear path forward when the unexpected happens. If you’d like to revisit yours or learn more about how to put one in place, Merrimack Wealth Management is here to help.
This content is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.