Utah Life Producer Practice Exam

What is the purpose of a buy-sell agreement?

1. To determine business operations

2. To dictate terms for selling a deceased partner's share

3. To manage company debts

4. To establish employee stock ownership

The correct answer is: To dictate terms for selling a deceased partner's share

A buy-sell agreement primarily serves the function of dictating the terms for selling a deceased partner's share in a business. This legally binding contract outlines how the ownership interest of a partner who passes away will be transferred. It ensures that the remaining partners have the option to purchase the deceased partner's share under agreed-upon conditions, thereby maintaining control and stability within the business. This is crucial for preventing external parties from acquiring a stake in the business unexpectedly, which could disrupt operations and relationships among remaining partners. The agreement also facilitates a clear valuation of the business shares and helps in arranging for the necessary funds, often through life insurance policies, to ensure that the surviving partners can buy out the deceased’s shares without financial strain. While determining business operations, managing company debts, and establishing employee stock ownership are all important aspects of business management, they do not specifically pertain to the main role of a buy-sell agreement as it relates directly to ownership transfer upon the death of a partner. The unique focus on the ownership transition is what makes the buy-sell agreement vital for partnership stability and financial planning.