PSI Life Exam Practice Test

What type of agreement allows the surviving partner to purchase the deceased owner's interest in a business?

1. Co-ownership agreement

2. Buy-sell agreement

3. Partnership agreement

4. Insurance agreement

The correct answer is: Buy-sell agreement

The buy-sell agreement is a specific type of contract designed to ensure that upon the death of a business owner, the remaining partners have the option to buy the deceased owner's share of the business. This arrangement is crucial for maintaining the stability and continuity of the business, as it prevents outside individuals or heirs from unintentionally becoming involved in the operation of the business without the consent of the remaining partners. Such agreements typically outline the terms of the buyout, including how the purchase price will be determined—often by using a formula or based on an independent valuation. They can be funded through life insurance policies on the owners, safeguarding the remaining partners from financial strain and ensuring a clear process for transferring ownership rights. In contrast, a co-ownership agreement defines general terms between co-owners but does not necessarily focus on the transfer of ownership upon death. A partnership agreement primarily outlines the roles, responsibilities, and operational structures among partners, but may not specifically address the transition of ownership interests. An insurance agreement refers to policies for risk management rather than the mechanics of ownership transition. Thus, a buy-sell agreement is clearly the best fit for addressing the situation outlined in the question.