A buy-sell agreement is like a pre-nuptial for your business. If you have a partner, then you should have one. If you’re on your own, own the business with your spouse, or plan on leaving the business to your children, then you probably don’t need one.
Here’s how it works: All of the owners decide which events trigger a right or option to purchase each other’s interest in the business. The owners then decide how to determine the price and payment terms when that event is triggered.
So why should you do this? Let’s look at the Beatles. Let’s say Ringo dies, divorces, is disabled, wants out, or anything else that changes ownership in the band. If one of these events happened the band might end up with a new drummer they don’t want. They can offer to buy Ringo’s interest in the band, but they might not have the money to do this. All of this can end up in some nasty and expensive disputes.
It’s best to avoid such disputes by deciding these issues when everyone is happy—during the honeymoon period. That makes things much easier, creates a market for the business interest (because often it’s difficult to sell less than 100% interest to an outsider), and keeps ownership stable. Even the Beatles split up.