A buy-sell agreement decides in advance what happens to an owner's share when they leave the business, by whatever route.
The events it covers
Death. Long-term illness or disability. Retirement. An owner wanting to sell. An owner being removed. Divorce or bankruptcy, either of which can otherwise put a share into the hands of a third party.
Why it is settled in advance
Every one of these arrives at a bad moment, and without an agreement the surviving owners are negotiating with a bereaved family, a former partner, or a court.
The predictable outcome is a co-owner nobody chose, with no interest in the business and a claim on its profits.
What it has to specify
Who may buy — the other owners, the business itself, or a named person.
Whether the purchase is required or optional. An option that nobody exercises leaves the share where it is.
How the price is set. Either a formula, a stated value reviewed periodically, or an independent valuation. This is the clause most often left vague and most often disputed — see business valuation.
How it is paid. Few small businesses can buy out a share in cash, so terms usually run over years, and those terms belong in the agreement rather than being negotiated afterwards.
Funding it
Life insurance on each owner, with the proceeds funding the purchase, is the common arrangement for death. Disability cover addresses the same problem for incapacity.
This is what makes the agreement executable rather than aspirational, and it is generally inexpensive relative to the sum involved — see key person risk.
Where it sits
Frequently inside the operating agreement, sometimes as a separate document. Either works; having neither does not.
Reviewing it
A value fixed years ago will be wrong. A periodic review, and a stated method rather than a stated number, is what keeps it usable.