A buy-sell agreement is a contract between business partners that decides, in advance, what happens to a partner’s share of the business if they die, become disabled, retire or simply want out. Without one, that decision gets made under pressure, usually by a grieving family or a dispute between the remaining partners, and rarely quickly.
The agreement only works if it is signed before anyone needs it. Waiting until a partner is ill or a relationship has soured is too late, because by then nobody can agree on the value or the terms.
What the agreement actually sets out
Three things, at minimum. Who has the right to buy the departing partner’s share, usually the remaining partners or the company itself. How that share is valued, since a formula agreed in advance avoids a fight over valuation later. And how the purchase is funded, which is where the agreement stops being a legal document and starts needing money behind it.
The two structures, and why the difference matters
Cross-purchase. The remaining partners buy the departing partner’s shares directly, in proportion to their existing stakes. Simple with two partners, harder to administer with several, because each partner needs their own funding arrangement.
Entity purchase. The company itself buys back the shares. One policy, one funding pool, simpler with more than two partners, though it changes each remaining partner’s proportional stake in a way a cross-purchase does not.
A hybrid is common in practice: the company has the first right to buy, and whatever it cannot fund falls to the remaining partners individually.
Funding it with life insurance, and the tax rule that decides whether it works
Most buy-sell agreements are funded by a life insurance policy on each partner, sized to their share’s value, so the money to complete the purchase exists the moment it is needed rather than depending on the business finding it in a hurry.
The tax treatment is where this goes wrong if it is set up badly. Under section 3(3)(a)(ii) of the Estate Duty Act, the policy proceeds are excluded from the deceased partner’s estate for estate duty purposes, provided the policy was taken out specifically to fund the buyout and, critically, the deceased partner did not pay any of the premiums themselves. If the departing partner paid their own premium, even partially, the exemption falls away and the payout is dragged back into their estate.
That single condition is why a buy-sell policy has to be structured and paid for correctly from day one, and why it is worth having a broker or tax adviser confirm the arrangement rather than assuming a standard life policy does the job.
What belongs in the written agreement
- The partners and their equity stakes. Precisely, not roughly.
- The triggering events. Death, permanent disability, retirement, resignation, and what happens if a partner is expelled or sequestrated.
- The valuation method. A fixed formula, an independent valuer, or an agreed multiple, decided now rather than argued about later.
- The funding mechanism. The insurance policy or other funding source, and who owns and pays for each policy.
- What happens to voting rights and involvement between the triggering event and the completed buyout.
What it costs you not to have one
The absence of a buy-sell agreement does not mean nothing happens when a partner leaves, it means the outcome is decided by default rules rather than by you. Under the Companies Act, a deceased or departing shareholder’s shares generally pass to their estate or heirs, which can leave the remaining partners running a business alongside someone they never chose to work with, whether that is a spouse with no interest in the business or an heir who wants to sell to a competitor.
Disputes over an undocumented departure are also slower and more expensive to resolve than a formula agreed years in advance would have been. Valuers get engaged, lawyers get involved, and the business itself often suffers through the uncertainty while the dispute plays out. The agreement’s real value is not the document, it is the argument it prevents.
Review it, do not just sign it once
A buy-sell agreement drafted when a business was worth very little is a liability if it is never revisited. Valuations move, partners’ shareholdings change, new partners join. Review the agreement and the insurance cover behind it whenever ownership changes or at least every few years, because an out-of-date valuation formula defeats the entire purpose of having agreed one in advance.
Frequently asked questions
Do sole proprietors need a buy-sell agreement?
Not in the partnership sense, since there are no co-owners to buy out. A sole proprietor’s exit and succession planning is closer to estate planning for entrepreneurs, which covers what happens to the business itself.
Is the insurance premium tax deductible?
Generally not, when the policy is structured to qualify for the estate duty exemption. Confirm the specific treatment with a tax adviser before assuming either way, since getting this wrong can undo the exemption.
What happens if there is no buy-sell agreement in place?
The departing partner’s shares typically pass to their estate or heirs under the Companies Act and the company’s own memorandum of incorporation, which can leave the remaining partners in business with someone they never chose to partner with.
Can a buy-sell agreement be changed later?
Yes, and it should be, as the business and its ownership change. Amend it with the same care as the original, since a stale valuation formula can be worse than none at all.
Does a two-partner business need this as much as a larger one?
Arguably more. With only two partners, one partner’s exit either hands full control to the other or forces a sale, and there is no wider ownership group to absorb the disruption.
Where to start
If you are in a partnership without one of these agreements, treat it as urgent rather than eventual. Agree the valuation method and the triggering events first, get the funding structured correctly with a broker who understands the estate duty condition, and put it in writing before anyone’s circumstances change.
This article was updated in September 2026.
