By Harry Prabandham · Updated September 28, 2026
Personal Finance
Buy-Sell Agreements: Structures, Triggers, Funding, and Valuation
A buy-sell agreement sets who buys an owner's stake, when, and at what price after death, disability, or exit. Structure and funding drive tax results.
Buy-Sell Agreements: Structures, Triggers, Funding, and Valuation
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What is a buy-sell agreement?
- A buy-sell agreement is a contract among business owners, and sometimes the company, that controls what happens to an owner's interest after defined events.
- It can keep ownership with the remaining owners rather than passing to an estate, ex-spouse, or creditor.
- It sets a price, or a method for finding one, and how the purchase will be paid.
- Without one, the entity's governing documents and state law decide, which may not match the owners' intentions.
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What is a buy-sell agreement?
- A buy-sell agreement is a contract among business owners, and sometimes the company, that controls what happens to an owner's interest after defined events.
- It can keep ownership with the remaining owners rather than passing to an estate, ex-spouse, or creditor.
- It sets a price, or a method for finding one, and how the purchase will be paid.
- Without one, the entity's governing documents and state law decide, which may not match the owners' intentions.
What are the main structures?
- Cross-purchase: the remaining owners buy the departing owner's interest.
- Entity redemption: the company buys the interest back.
- Hybrid, or wait-and-see: the parties decide at the time which buyer steps in, often with the company as backstop.
- In a cross-purchase, buyers get cost basis in the shares they buy; in a corporate redemption, remaining owners' basis doesn't increase.
Which events trigger a buyout?
- Death and long-term disability are the most common triggers.
- Retirement, voluntary departure, termination, divorce, bankruptcy, or loss of a required license can also be included.
- Disability triggers need a clear definition and waiting period, ideally matched to any disability buyout insurance.
How are buyouts funded?
- Life insurance is common for death triggers, owned by the co-owners or the company depending on the structure.
- For company-owned policies, written notice and consent from the insured before issue is required to keep proceeds generally income-tax-free.
- Disability buyout insurance, cash reserves, or installment notes can fund other triggers.
- An unfunded agreement can leave owners with an obligation they can't afford to meet.
What changed after Connelly v. United States?
- In June 2024, the Supreme Court held that life insurance proceeds a corporation receives to redeem a deceased owner's shares count toward the company's value for estate tax.
- The Court held the redemption obligation doesn't offset those proceeds.
- That can raise the estate tax value of a deceased owner's stake under an insurance-funded entity redemption.
- With a $15 million per-person exemption in 2026, the effect depends on estate size; an estate attorney can review existing agreements.
How is the price set?
- A fixed price is simple but goes stale if the owners don't update it.
- A formula, such as a multiple of earnings, updates automatically but can drift from market value.
- An appraisal at the trigger date reflects current value but adds time and cost.
- For estate tax, a price set in the agreement is respected only if it meets Section 2703's tests, including being comparable to arm's-length arrangements.
Key takeaways
- Every multi-owner business benefits from deciding in advance who buys, when, and at what price.
- Cross-purchase and redemption structures differ in basis, funding, and estate tax results.
- Connelly changed the estate tax math for insurance-funded redemptions.
- Keep valuation terms current and have an attorney and CPA review structure and funding.
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