Posted by Jennifer M. Settles, Esq. | June 15, 2026

Buy-Sell Agreements: What Happens When a Partner Wants Out (or Dies)

When you start a business with partners, everyone is optimistic. You’re aligned, motivated, and focused on growth.  As a result, the question of what happens if one of you leaves rarely feels urgent. But partners do eventually exit. They retire, they want to cash out, they have a falling-out, they become disabled, they get divorced, or they die. When that happens without a plan in place, the result is often confusion, conflict, and sometimes a fight that threatens the business itself.

A buy-sell agreement is the document that answers those questions in advance, while everyone is still on good terms. Here’s what it does and why every co-owned business should have one.

What a Buy-Sell Agreement Actually Does

A buy-sell agreement is a binding contract among the owners of a business (or between the owners and the company) that governs what happens to an owner’s interest when certain events occur. Think of it as a pre-negotiated exit plan: it sets the rules for transferring ownership before anyone has a reason to be adversarial. Because it’s agreed when interests are aligned, it removes much of the emotion and uncertainty from situations that would otherwise be ripe for dispute.

A buy-sell agreement can exist as its own standalone document, or its terms can be encompassed wihtin an LLC operating agreement or a shareholders’ agreement.

The Triggering Events

The heart of a buy-sell agreement is its list of “triggering events” – i.e., the circumstances that activate its provisions. Common triggers include an owner’s death, disability, retirement, voluntary departure, sale of membership interest, bankruptcy, divorce, or termination of employment. A well-drafted agreement spells out what happens in each scenario, because they don’t all call for the same treatment. The death of a founder and a partner simply wanting to cash out raise very different practical questions, for instance.

Who Buys the Departing Owner’s Share

When a triggering event occurs, someone usually has the right or obligation to buy the departing owner’s interest. There are a few common structures. In a “redemption,” the company itself buys back the interest. In a “cross-purchase,” the remaining owners buy it individually. Some agreements use a hybrid of the two or may include a right of first refusal approach. Each structure has different tax and practical consequences, and the right choice depends on the number of owners and the goals of the business.

How the Price Is Determined

Arguably the most important (and most fought-over) part of a buy-sell agreement is how the departing owner’s interest is valued. Without a clear method, you’re left arguing about what the business is worth at the worst possible moment. Agreements typically use a fixed price updated periodically or tied to CPI, a formula tied to earnings or book value, or an independent appraisal at the time of the event. Whatever the method, agreeing on it in advance prevents a painful and expensive dispute later.

How the Purchase Gets Funded

Agreeing that the company or the other owners will buy a departing owner’s share is only half the battle;  the remaining question is how does the purchase price in fact get funded?   The money has to come from somewhere. This is where many agreements fall short. For death or disability, life and disability insurance are often used to fund the buyout, so the business isn’t forced to drain its cash or take on debt at a difficult time. For other exits, agreements may provide for payment over time through a promissory note. Thinking through funding is what makes the agreement workable in practice rather than just on paper.

What Happens When a Partner Dies

Death is one of the most disruptive triggers, and one of the strongest reasons to have an agreement in place. Without one, a deceased owner’s interest typically passes to their heirs –  meaning you could suddenly find yourself in business with a spouse or children who have no experience running the company and may have very different priorities. A buy-sell agreement can require that the interest be bought out instead, providing the family with fair value and liquidity while letting the surviving owners keep control of the business they’ve built.

What Happens When a Partner Wants Out

A voluntary departure is less dramatic than a death but no less important to plan for. Can a partner sell their equity stake in the company to anyone they choose, including an outsider or a competitor? Most businesses don’t want that. A buy-sell agreement can give the company and the other owners a right of first refusal, restrict transfers to third parties, and set the terms on which a departing owner can be bought out, thus keeping ownership within a trusted group and avoiding an unwanted new partner.

What Happens When a Partner Divorces

A founder’s divorce can suddenly become the whole company’s problem. Depending on your state’s marital property rules, a divorcing owner’s interest in the business may be treated as a marital asset subject to division – which can mean a court awarding part of that interest to an ex-spouse, or forcing a sale to satisfy a settlement. Suddenly your business partner’s former spouse has a claim on the company. A buy-sell agreement can treat divorce as a triggering event, giving the company or the other owners the right to buy back any interest that would otherwise pass to a spouse, and keeping ownership within the original group rather than entangled in someone else’s divorce proceedings.

What Happens When a Partner Files for Bankruptcy

If an owner files for personal bankruptcy, their interest in the business generally becomes part of the bankruptcy estate – meaning a trustee or the owner’s creditors may be able to reach it to satisfy debts. Without advance planning, the remaining owners can find themselves dealing with a trustee, or even an outside party who acquired the interest, instead of their original partner. A buy-sell agreement can make bankruptcy a triggering event, allowing the company or the other owners to buy out the affected interest before it lands in unfamiliar hands. It’s worth noting that bankruptcy law can limit how strictly some of these provisions are enforced, so this is an area where careful drafting matters.

Why You Need One Before You Think You Do

The time to put a buy-sell agreement in place is when all the owners are getting along and no exit is on the horizon. Once a triggering event is imminent, or once relationships have soured, every term becomes a negotiation between parties with opposing interests, and agreement becomes far harder to reach. Like many of the most valuable legal protections, a buy-sell agreement is something you hope you never need, but are very glad to have when you do.

The Bottom Line

A buy-sell agreement protects both the business and its owners by deciding, in advance and in calmer times, what happens when a partner exits. It addresses the triggering events, who buys the interest, how it’s valued, and how the purchase is funded—turning what could be a crisis into a process. For any business with more than one owner, it’s one of the most important documents (or clauses within your LLC operating agreement) that you can have.

If your business has multiple owners and no buy-sell agreement, or one that hasn’t been reviewed in year, that’s a gap worth closing now, while everyone is still aligned. Schedule a free consultation to talk through what your agreement should include.   Contact us at www.jsettleslaw.com or (602) 617-3938.

About the Author Jennifer M. Settles makes business owners’ lives easier. With 25+ years structuring M&A deals, commercial contracts, corporate governance, and complex real estate transactions, including over two decades as lead in-house transactions counsel for major corporations, she brings big-firm firepower to the founders, dealmakers, and growing companies who need it most. Clients describe her as knowledgeable, refreshingly direct, and relentlessly focused on their best interests. Jennifer offers white-glove, direct-access service and transparent, predictable fees. Learn more or schedule a consultation.