Buy-sell agreement

A buy-sell agreement is a binding contract among the owners of a closely held business that spells out what happens to an owner's interest after a triggering event — most often death, but also disability, retirement, divorce or departure. It names the buyer, sets a price or valuation formula, and says how the purchase will be paid for.

Life insurance is the usual funding for the death trigger because it delivers cash exactly when it is needed. There are two basic structures: a cross-purchase agreement, in which the owners buy policies on each other, and an entity-redemption agreement, in which the business owns the policies and buys back the shares. Hypothetical example: two equal partners own a business valued at $2 million, and each owns a $1 million policy on the other. When one dies, the survivor collects $1 million and pays it to the deceased partner's family in exchange for the shares.

Common pitfalls are stale valuations, coverage that has not grown with the business, and choosing a structure without weighing taxes. The Supreme Court's 2024 decision in Connelly v. United States showed that company-owned insurance can raise the value of a deceased owner's shares for estate tax purposes. Review the agreement with an attorney and tax adviser; see funding a buy-sell agreement with life insurance and cross-purchase vs entity-redemption buy-sell plans.