Buy-Sell Agreements Explained: Funding a Partner Buyout Without Selling the Business

by Nasser ZreikaSep 8, 2026Succession Planning

Two business partners build a company for fifteen years. One of them dies suddenly.

Without a plan, the surviving partner doesn’t just lose a colleague — they can end up in business with the deceased partner’s spouse or estate, negotiating a price for shares neither side has the cash to actually settle.

A buy-sell agreement exists to stop that exact scenario, by locking in ahead of time how a partner’s share gets valued, transferred and paid for if death, permanent disability or a serious illness takes them out of the business.

It’s a strikingly common gap.

VistaPrint’s 2026 survey of 510 Australian small and medium business owners found 45% of those considering an exit had no succession or sale plan at all, and PwC’s Australian Family Business Survey put the figure without any documented succession plan at 83% nationally.

A buy-sell agreement is one of the more concrete, fundable pieces of that planning gap — it doesn’t just say what should happen, it puts the money behind it.

What a Buy-Sell Agreement Actually Is

A buy-sell agreement (sometimes called a business succession agreement or ownership succession deed) is a legal contract between business owners that sets out three things in advance:

The trigger events — typically death, total and permanent disablement (TPD), and sometimes a specified critical illness (trauma) diagnosis.
The valuation method — an agreed fixed value reviewed periodically, or a formula (e.g. a multiple of EBIT, or an independent valuation at the time).
The funding mechanism — almost always life, TPD and/or trauma insurance held specifically to fund the buyout, so the remaining owners aren’t scrambling for a bank loan or forcing a fire sale of business assets at the worst possible time.

It’s a distinct document from a shareholders’ agreement or partnership agreement, though it usually sits alongside one.

A shareholders’ agreement governs how the business runs day to day and how disputes are resolved; a buy-sell agreement governs what happens to an owner’s stake specifically because they’ve died, become permanently disabled, or in some structures, decided to exit.

Without the buy-sell piece, a shareholders’ agreement can say a departing owner’s shares “must be offered to the other shareholders first” — but it says nothing about where the money to actually buy them comes from.

The Problem It Solves: A Buyout Nobody Can Afford

Without funding in place, a triggering event usually forces one of a few unappealing outcomes: the surviving owners take out debt to buy the departing owner’s share, the business is sold in whole or in part to raise cash, or the departing owner’s family becomes an unwilling (and often unwelcome) co-owner of a business they have no experience running.

None of these outcomes are good for the people left holding the business, and none of them are good for the family who just lost an income earner and now holds an illiquid stake they can’t easily sell.

Insurance-funded buy-sell agreements solve the liquidity problem directly. When the trigger event happens, the policy pays out, and that payout is used — under the terms already agreed in the buy-sell deed — to transfer the departing owner’s interest to the surviving owners.

The departing owner or their estate receives fair value in cash rather than an ongoing (and often awkward) stake in a business they no longer have a say in.

Three Ways to Own the Insurance — and Why It Matters

How the underlying policies are owned changes who pays the premiums, what happens to a policy if ownership changes, and how the eventual payout is taxed. There are three main structures used in Australia.

Ownership structure	How it works	Watch out for
Self-owned (cross-purchase)	Each owner personally owns a policy on each of the other owners’ lives, and receives the payout directly to fund their share of the buyout.	Gets administratively heavy as the number of owners grows — three owners need six policies (2 x 3) for full cross-cover.
Entity-owned	The company (or a related entity) owns a policy on each owner and uses the proceeds to buy back the departing owner’s shares.	Simpler administration, but the payout can affect the company’s asset value and may have capital gains and Division 7A implications depending on structure.
Insurance trust-owned	A separate trust holds all the policies and directs proceeds according to the buy-sell agreement, independent of the business or personal estates.	Cleanest separation of the insurance from the business and personal balance sheets, but requires its own trust deed and ongoing administration.

Why Your Super Fund Is (Usually) the Wrong Place for This Cover

It’s tempting to hold buy-sell insurance inside superannuation, including an SMSF, because premiums can potentially be paid with pre-tax contributions.

The ATO has taken a clear position against this, though. In ATO Interpretative Decision 2015/10, the ATO found that an SMSF purchasing life insurance specifically as a condition of a buy-sell agreement breaches both the sole purpose test (the fund must be maintained only for retirement and related purposes) and the ban on an SMSF providing financial assistance to a member or their relative under section 65 of the Superannuation Industry (Supervision) Act.

In practice, this means an SMSF that owns a buy-sell policy risks becoming a non-complying fund, with significant tax and penalty consequences — well beyond the value of the buyout it was meant to help fund.

Where clients still want the tax-effective premium funding of superannuation, a large retail or industry super fund arrangement (rather than an SMSF) is generally considered lower risk, but it needs to be structured and documented so the insurance genuinely serves the fund’s retirement purpose rather than being an explicit condition of the buy-sell agreement.

For most family and small business buy-sell arrangements, self-owned, entity-owned or insurance trust-owned policies remain the more straightforward and lower-risk options.

Put and Call Options vs a Straight Buy-Sell Deed

Many buy-sell arrangements are documented using put and call options rather than an unconditional sale agreement. A call option gives the continuing owners the right (but not the obligation) to buy the departing owner’s interest; a put option gives the departing owner (or their estate) the right to require the continuing owners to buy it.

Structuring the agreement this way, rather than as an automatic binding sale, can matter for capital gains tax timing and for eligibility for concessions like the small business CGT concessions, so the drafting detail genuinely affects the tax outcome — this is not a place to use a generic template without a lawyer and accountant reviewing it against your specific structure.

One piece of good news for South Australian business owners: SA abolished stamp duty on the transfer of most non-land business assets and on transfers of shares in private companies back in 2015, which removes a cost layer that still applies in some other states when a buy-sell agreement triggers a transfer of business interests.

Duty can still apply if real property forms part of what’s being transferred, so it’s worth checking the detail of what the business actually owns.

Getting the Valuation Right — and Keeping It Right

A buy-sell agreement is only as good as the value it’s built around. Two approaches are common:

Agreed value: the owners set a dollar figure and revisit it annually or at a set interval. Simple, but it can drift out of date if it isn’t actually reviewed — an agreed value from five years ago in a business that’s since doubled in size leaves a real funding shortfall.
Formula or independent valuation: the agreement specifies a method (e.g. a multiple of average EBIT over the last two years, or an independent valuer appointed at the time) so the figure moves with the business, at the cost of some certainty about what the payout will actually be.

Either way, the insured sum needs to be checked against the valuation method periodically. A buy-sell agreement that was perfectly funded when the business was worth $2 million is only half-funded if the business has grown to $4 million and nobody updated the cover.

Setting Up a Buy-Sell Agreement: The Practical Sequence

Agree the trigger events (death, TPD, and whether trauma/critical illness is included).
Agree the valuation method and how often it will be reviewed.
Choose the ownership structure for the insurance (self-owned, entity-owned or trust-owned) based on the number of owners, tax position and how the business is structured.
Obtain life, TPD and/or trauma cover sized to each owner’s share of the agreed value — not an arbitrary round number.
Have the buy-sell deed drafted (or reviewed) alongside the shareholders’ or partnership agreement, so the two documents don’t contradict each other.
Calendar a review at least every one to two years, and immediately after any major change in business value, ownership split, or personal circumstances.

A buy-sell agreement is one piece of a broader plan rather than a substitute for it — our guide to business succession planning in Adelaide covers the wider sequence, including what happens if you’re unable to work before any formal handover is due.

If super and personal estate planning also sit alongside the business, it’s worth reviewing how they interact — see our article on binding death benefit nominations for how super benefits are directed separately from a will or a buy-sell payout.

Frequently Asked Questions

Is a buy-sell agreement the same as key person insurance?

No. Key person insurance compensates the business itself for the financial impact of losing someone critical to its operations — covering things like lost revenue, recruitment costs or loan repayments. A buy-sell agreement specifically funds the transfer of an owner’s equity stake to the remaining owners. A business can hold both, and many do, because they solve different problems.

Can a buy-sell agreement cover a voluntary exit, not just death or disability?

Insurance can only fund insurable events — death, TPD, and sometimes trauma. A voluntary exit or retirement isn’t an insurable trigger, so the buy-sell agreement (or a separate shareholders’ agreement provision) needs its own funding mechanism for that scenario, such as vendor finance, a bank facility, or a gradual buy-out over time.

Who should own the insurance policy in a two-partner business?

There’s no single right answer — it depends on the business structure, the tax position of each partner, and how much administrative complexity you’re willing to take on. A self-owned cross-purchase arrangement is straightforward with only two owners, while an entity-owned or trust-owned structure tends to scale better as the number of owners grows. This is worth modelling against your actual numbers before choosing.

How often should a buy-sell agreement be reviewed?

At least every one to two years, and immediately after any material change — a new owner joining, a change in the business’s value, a change in personal circumstances such as marriage or divorce, or a restructure of the underlying business or trust. An agreement built around a valuation from years ago is a common way these arrangements quietly stop matching the business they’re meant to protect.