What is the primary function of a buy-sell agreement?

The primary function of a buy-sell agreement is to provide funding for business continuity. Such agreements are typically established between co-owners of a business to ensure that there is a clear plan in place for transferring ownership when a triggering event occurs, such as the death, disability, or retirement of a business owner. This helps to maintain the stability of the business and can prevent disruptions that might arise from ownership disputes.

The funding aspect often involves life insurance policies, which are used to provide the necessary capital to buy out the departing owner's share of the business. This ensures that the remaining owners can continue operations without needing to find an external buyer or secure additional financing in a rush, which can destabilize the business. By clearly defining how ownership transitions occur and ensuring that financial resources are earmarked for this purpose, a buy-sell agreement plays a critical role in sustaining business continuity.

Other options, while potentially relevant in a broader context, do not specifically capture the essence of what a buy-sell agreement is designed to accomplish. For instance, retirement plans focus on individual financial security after leaving the workforce, tax benefits pertain to estate planning, and income replacement during disability relates to personal insurance needs rather than business succession planning.