What is a "buy-sell agreement" in business insurance?

A buy-sell agreement is a crucial component in business insurance as it is designed to provide a seamless transition of business ownership when an owner passes away. This legal contract outlines how a deceased owner's share of the business will be sold or transferred, typically to surviving partners or designated beneficiaries. By specifying the terms of the ownership transfer, the agreement helps maintain stability in the business and protects the interests of both the surviving owners and the deceased owner's family.

This mechanism is particularly vital in closely held businesses where ownership and management are closely intertwined. It ensures that the remaining owners can continue business operations without disruption and that the departed owner’s estate receives fair compensation for their share, usually funded through life insurance policies specifically set up for this purpose. This arrangement safeguards the financial future of the business by preventing outside parties from acquiring ownership stakes inadvertently and establishing a clear path for continuity.