A buy-sell agreement (also called a "business prenup") controls what happens to a co-owner's interest when a triggering event occurs. Without one, you could end up in business with your partner's ex-spouse, children, or a competitor who bought the interest. Click any trigger event below to see what your agreement needs to address.
| Feature | Cross-Purchase | Entity Redemption |
|---|---|---|
| Who buys the interest? | Remaining owners individually | The business entity |
| Step-up in basis (death) | Better — full step-up | No step-up for survivors |
| Life insurance ownership | Each owner buys policy on others | Entity owns all policies |
| Insurance complexity | Complex with many owners | Simpler — entity manages |
| Best for | 2–3 owners; tax-conscious | 4+ owners; administrative ease |
| Corporate AMT risk | No risk | C-Corps: AMT on proceeds |
| Hybrid option | Wait-and-see buy-sell: entity has first right, then owners, then third parties | |
| Method | How It Works | Best For | Drawback |
|---|---|---|---|
| Fixed Price | Partners agree on a dollar amount annually | Simple businesses; early stage | Goes stale quickly if not updated |
| Book Value | Net assets per financial statements | Asset-heavy businesses | Ignores goodwill and intangibles |
| Capitalization of Earnings | Average earnings ÷ cap rate | Profitable service businesses | Cap rate selection is subjective |
| Appraisal | Independent 3rd-party valuation | Complex or large businesses | Expensive; can still be disputed |
| EBITDA Multiple | Earnings × agreed industry multiple | Mid-market companies | Multiple must be updated; EBITDA can be manipulated |
| Formula | Defined formula (e.g. 3× revenue) | Specific industries with norms | May not reflect actual value |