Buy-Sell Agreements for Family Businesses: Why They Matter

This article is not intended as legal, tax, fiduciary, or investment advice.

Key takeaways:

• A buy-sell agreement creates a clear plan for how to handle transitions if an owner dies, becomes disabled, retires, or leaves the business.
• These agreements help protect the business, the remaining owners, and family members.
• Reviewing and updating a buy-sell agreement regularly helps ensure it continues to reflect the business’s value, ownership structure, and long-term family goals.

As a business owner, you’ve likely spent years focused on growth and creating opportunities for your employees and your own family. But chances are you’ve spent far less time preparing for the moments—such as an illness, death, or sudden departure of a partner—that could unexpectedly change everything.

A buy-sell agreement helps reduce uncertainty in these moments by establishing what happens to your share of the business.

What is a buy-sell agreement?

A buy-sell agreement is a legally binding agreement that outlines what happens to your share of the company when certain events occur, such as death, disability, retirement, or a decision to leave the business.

It clearly defines:

• Who can buy your interest in the business
• How the business will be valued
• How and when the ownership transition will take place

A buy-sell agreement protects the business from disruption, but, just as importantly, it protects the people connected to it. It prevents you or your partners from suddenly finding yourselves in business with someone you didn’t expect, such as an owner’s spouse, heir, or an outside buyer.

It also protects your family by removing ambiguity during difficult moments. Instead of forcing loved ones to make rushed financial decisions or negotiate with remaining owners, it provides a clear process to help everyone move forward.

Why do family businesses need buy-sell agreements?

Ownership of a family business is rarely just a financial matter. Shares in the company might represent years of effort and personal sacrifice and transitions can affect family relationships. Without a clear plan, questions about who should take over create tension during already difficult times.

A buy-sell agreement helps you address the financial and emotional sides of sudden ownership changes. You can address these issues in advance, when everyone involved can focus on what’s best for the family and the business.

What are the three types of buy-sell agreements?

Most buy-sell agreements fall into one of three general structures. The one you choose should reflect the size of your ownership group, the amount of capital you would have available for a buyout, and your goals for the company’s future.

1. Cross-purchase agreements

Cross-purchase agreements allow (or sometimes require) the remaining owners to buy the departing owner’s share directly.

For example, say you have two business partners, and one wants to retire. With a cross-purchase agreement in place, you could purchase the retiring partner's ownership interest, increasing your stake in the business.

This approach works well for companies with a small number of owners because it keeps ownership concentrated among the remaining partners.

2. Business entity redemption agreements

With entity redemption agreements, remaining individual owners don’t purchase shares from a departing owner. Instead, the business buys back their interest and redistributes ownership among the remaining stakeholders.

This approach can be easier to manage administratively, especially if there are several owners.

3. Hybrid agreements

Hybrid agreements combine elements of both approaches. For example, they might require cross-purchase upon an owner’s death, but allow entity redemption when an owner retires.

What common challenges can buy-sell agreements help address?

Many of the biggest challenges in buy-sell agreements aren’t obvious at first. They tend to surface later—often as unresolved questions about value, funding, timing, and family involvement.

What is the business valuation process?

One important element in any buy-sell agreement is determining how to value the business for an ownership transfer. Some agreements establish a fixed price, while others rely on a formula or require a professional business valuation at the time of the event.

Who will pay for the buyout?

Often, buy-sell agreements outline how a buyout should happen without clearly addressing how the remaining owners or the business will pay for it. Owners might assume they’ll figure it out when the time comes.

But without a realistic funding plan, the cost of purchasing an owner’s shares can strain the business and the individuals involved.

No matter what type of buy-sell agreement you choose, you can plan for these obligations by buying life insurance, arranging financing, or maintaining reserves.

How often should a buy-sell agreement be updated?

Over time, ownership structures change, company valuation increases, and family circumstances evolve. Review and update your agreement periodically to ensure it reflects the current reality of the business and the intentions of the owners.

Who should be involved in creating the buy‑sell agreement?

In a family business, ownership decisions can affect multiple generations and family members, some of whom may not be involved in daily operations.

Instead, bring family members into the conversation early to help align expectations, reduce uncertainty, and ensure a buy‑sell agreement works the way everyone intends when it matters most.

Does everyone understand the buyout terms?

Some agreements are technically well-written but poorly understood by the people they affect. Disagreements can still happen if you or your partners don’t fully understand how shares will be valued, who has the right to purchase them, or how you’ll fund transactions.

A buy-sell agreement works best when everyone involved understands the plan and the reasoning behind it.

What if the agreement was never formally documented?

You might have a verbal understanding or even a few notes written about conversations on ownership transitions. These informal agreements might be well-intended, but they’re rarely enforceable and often leave important details unresolved.

Make sure you have a formal written contract to avoid disagreements around valuation, timing, and purchase rights.

How do buy-sell agreements support family harmony?

Buy-sell agreements are legal precautions, but they also help maintain family harmony by clarifying expectations in advance. They give families a chance to discuss sensitive issues like succession, ownership transfers, and finances calmly and thoughtfully, before emotions run high.

A well-designed agreement aligns business transitions with the family’s long-term vision. Some families may want to keep ownership for the next generation or allow certain family members to step away while ensuring the company remains stable.

Certainty is a gift to the next generation

Every family business eventually faces moments of transition. Without a buy-sell agreement, illness, retirement, unexpected departures, and generational changes force difficult decisions at times when family members are already under stress.

A well-crafted agreement protects the business and the relationships that sustain it by reflecting how the business actually operates, recognizing the roles different family members play, and acknowledging the financial realities involved in transferring ownership.

We’ll help you plan ahead

The best time to address business transition questions is long before they become urgent. The Center for Family Business & Entrepreneurs from Bank of Hawaii can help guide conversations about estate planning, succession, and long-term business planning. We support business owners who desire a holistic approach to planning, along with greater confidentiality in evaluating, identifying, and optimizing opportunities for their business and family, and where they intersect.

To begin a conversation, contact your banker or contact us to request a consultation.

Frequently Asked Questions

Is a buy-sell agreement legally binding?

Yes. A properly drafted and executed buy-sell agreement is a legally binding contract that outlines how the business, its owners, or heirs will transfer ownership interest when certain events occur, such as death, disability, retirement, or an owner’s departure.

What are the three types of buy-sell agreements?

The three most common types of buy-sell agreements are cross-purchase agreements, entity redemption agreements, and hybrid agreements, which combine elements of the other two. The right type of agreement depends on the size and structure of the business and the owners’ goals.

Curtis Fessler is a Senior Wealth Strategist with more than two decades of experience guiding families through complex financial decisions. Specializing in succession, estate, and philanthropic planning, Curtis combines technical insight with a deep understanding of family dynamics to help clients achieve lasting impact.

This article is provided for informational and educational purposes only and is not intended as legal, tax, accounting, or investment advice. The information presented does not take into account the specific circumstances, objectives, or needs of any individual or business. Readers should consult their own legal, tax, and financial advisors before taking any action.