What is a buy/sell agreement?

A buy/sell agreement is a legally binding contract that outlines the procedures that will be followed regarding the ownership interests in a business when a co-owner passes away or becomes incapacitated. This type of agreement is crucial for ensuring that the business can continue to operate smoothly by setting clear expectations on how ownership transfers will occur, typically involving the remaining owners or the business itself purchasing the deceased owner’s shares.

The agreement helps prevent disputes among surviving owners and allows for a fair valuation of the business stakes at the time of the owner’s death. It often involves life insurance policies on the owners to fund the buyout, which ensures that sufficient funds are available to purchase the deceased’s interests without significantly impacting the business's finances. Thus, option C accurately reflects the primary function and significance of a buy/sell agreement.