What Should My Buy-Sell Agreement Cover So a Co-Owner’s Death or Exit Doesn’t Disrupt the Business?

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A business can spend years building a strong management team, healthy cash flow and valuable customer relationships, then find itself scrambling because one owner dies, becomes disabled or decides to leave. A well-designed Buy Sell Agreement determines what happens before emotions, family interests and financial pressure enter the room. For companies with multiple owners, it should be a central part of business succession planning, not a document that disappears into a file after it is signed.

What a Buy-Sell Agreement Does and Why Every Co-Owned Business Needs One

A buy-sell agreement establishes who may purchase an owner’s interest, when a purchase can or must occur, how the interest will be valued and how the purchase will be funded. Typical triggering events include death, disability, retirement, divorce, termination of employment and voluntary or involuntary departure.

Without an agreement, ownership may pass to an estate, spouse or other heir who never expected to become a business owner. Remaining owners may then have no predetermined right, price or funding mechanism for acquiring that interest. The agreement creates a controlled process for transferring ownership rather than leaving the parties to negotiate during a crisis.

The Key Provisions Every Buy-Sell Agreement Should Include

The agreement should clearly define triggering events, eligible buyers, purchase obligations, valuation methodology, payment terms and restrictions on transfers to outsiders. It should also address disability, retirement, divorce, deadlock and what happens if an owner wants to sell voluntarily.

Just as important, the agreement should specify deadlines and procedures. Who determines that a trigger has occurred? When must a valuation be completed? Is the purchase mandatory or optional? Are payments made immediately or through installments?

These details matter because a buy-sell agreement is tested when circumstances are already difficult. During Financial Due Diligence, outdated ownership provisions or unclear redemption obligations can also become issues for a prospective buyer.

Cross-Purchase vs Entity Redemption: Choosing the Right Structure

Under a Cross Purchase Agreement, the remaining owners purchase the departing or deceased owner’s interest. When shares are purchased directly, the purchasers generally obtain tax basis equal to the amount they pay for the acquired shares.

Under an Entity Redemption, sometimes called a stock redemption plan, the company purchases the owner’s interest instead. This can simplify administration when several owners are involved because the company can own the insurance policies and handle the redemption directly.

Tax consequences can differ substantially. In Connelly v. United States, decided June 6, 2024, the U.S. Supreme Court held that life insurance proceeds payable to a corporation generally must be included in its value when determining a deceased shareholder’s stock value for federal estate-tax purposes. The Court also held that a corporation’s obligation to redeem shares at fair market value does not, by itself, offset those proceeds.

In broader restructuring or succession planning, an F Reorganization may also be considered in appropriate circumstances, but it addresses a different set of tax and entity-structure objectives and should be coordinated separately with the ownership transition plan.

How to Fund a Buy-Sell Agreement So the Money Is There When You Need It

An agreement that requires a multimillion-dollar buyout is only useful if someone can actually produce the multimillion dollars.

Life insurance is frequently used for death-related buyouts. In a two-owner cross-purchase arrangement, each owner may hold a policy on the other. Under an entity redemption structure, the company may own policies on its owners. Life insurance death benefits are generally excluded from taxable income, although important exceptions apply when policies have been transferred for valuable consideration.

Other funding methods include company cash reserves, installment payments and borrowing. The right approach depends on the number of owners, business liquidity, owner ages and health, purchase price and the company’s ability to service debt without impairing operations.

How Business Valuation Fits Into a Buy-Sell Agreement

A buy-sell agreement needs a valuation method that can still produce a reasonable answer several years after the document is signed. Three common approaches are a fixed price agreed upon by the owners, an appraisal of fair market value, or a formula based on measures such as revenue, EBITDA or cash flow.

Fixed prices are simple but become obsolete quickly. Formulas provide consistency but can produce unintended results as the business changes. Independent appraisal provides flexibility but requires more time and professional judgment.

For federal estate-tax purposes, fair market value generally reflects what a willing buyer and willing seller would agree to with neither under compulsion. IRS rules can also disregard certain restrictive agreements when statutory requirements are not satisfied.

That issue matters for owners of valuable closely held businesses. For deaths occurring in 2026, the federal estate tax basic exclusion amount is $15 million, compared with $13.99 million in 2025. Regularly reviewing the valuation provision and coordinating it with insurance coverage, estate planning and the company’s current financial position can help keep the agreement aligned with the business’s value and the owners’ objectives.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Trusts & Estates Planning, or call us at 770.396.2200.

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