Buy-sell agreements: protect the business you built
A buy-sell agreement decides what happens to an owner's share when they die, become disabled, or leave — and where the money to buy it comes from. This is your starting point: what they are, how they're funded, and the three ways to structure one.
What is a buy-sell agreement?
A buy-sell agreement is a legally binding contract among the owners of a closely held business — and sometimes the business itself — that controls what happens to an owner's interest when they exit. It answers two questions in advance, before emotion or money is on the line: who buys the departing owner's share, and at what price.
Think of it as a will for your business. Without one, the death, disability, or departure of an owner can throw a company into chaos: heirs who don't want to run it, surviving owners who can't afford to buy them out, and disputes that can sink the business entirely.
A well-drafted agreement fixes the valuation method, names the triggering events, and — critically — identifies the funding source so the cash is actually there when it's needed. Life insurance is the most common way to fund it, because it delivers a lump sum at the exact moment a death triggers the buy-out.
The agreement is one decision; how you structure and fund it is another. That's where the three approaches below come in — each with different tax, cost, and administrative trade-offs.
A buy-sell agreement is a pre-arranged deal: when an owner dies or leaves, someone is obligated to buy their share at a set price, with the money already lined up. It protects the family, the surviving owners, and the business all at once.
What a good buy-sell settles
Who buys. A guaranteed buyer, so no owner's family is stuck with an unsellable stake.
At what price. A valuation method agreed in advance, heading off family disputes.
With what money. A funding source — usually life insurance — so the cash is there on day one.
On what events. Clear triggers: death, disability, retirement, and more.
Who stays out. Outside heirs can't force their way into ownership or management.
What sets a buy-out in motion
A buy-sell isn't only about death. A complete agreement names every event that should force — or allow — a buy-out, so nothing is left to chance or goodwill.
Death
The classic trigger. The deceased owner's interest is bought from their estate, giving the family cash and the survivors continuity.
Disability
A permanent disability can sideline an owner who still holds equity. A disability buy-out funds their exit when they can no longer contribute.
Retirement
An orderly, pre-priced exit when an owner steps away — no last-minute negotiation over what their stake is worth.
Voluntary departure
An owner who wants out (or wants to sell) is routed through the agreement first, keeping the interest from landing with an outsider.
Divorce
Prevents a divorcing owner's spouse from receiving a stake in the business as part of a settlement.
Bankruptcy or dispute
An owner's bankruptcy, creditor claim, or an irreconcilable deadlock can trigger a buy-out to protect the remaining owners.
The three ways to structure a buy-sell
Once you know you need a buy-sell, the next decision is who owns the insurance and who does the buying. Each structure carries different tax, cost, and administrative trade-offs. Explore the dedicated guide for each.
Entity Purchase
The business owns the policies and buys back (redeems) the departing owner's interest itself.
- + You want the simplest administration
- + You have three or more owners
- + Estate tax isn't a concern
- − Connelly can raise estate tax; no basis step-up
Cross-Purchase
The owners personally own policies on one another and buy the deceased's interest directly.
- + You want maximum tax efficiency
- + You have two or three owners
- + A basis step-up matters to you
- − Many policies; transfer-for-value risk
Own-Your-Own Policy
Each owner insures their own life and endorses the benefit to the co-owners to fund the buy-out.
- + You want one portable policy each
- + You want cross-purchase tax results
- + You want to avoid transfer-for-value
- − Split-dollar drafting is more complex
Compare the three at a glance
There is no single "best" structure — only the right fit for your number of owners, your entity type, and your estate-tax exposure. Here's how they stack up on the factors that move the needle.
| Factor | Entity Purchase Stock redemption — business owns the policies | Cross-Purchase Each owner insures the other owners | Own-Your-Own Policy Each owner insures their own life, endorsed to others |
|---|---|---|---|
| Who owns the policy | The business entity | Each owner, on every other owner | Each owner, on their own life |
| Policies for N owners | N One per owner | N × (N−1) Grows fast | N One per owner |
| Premium fairness | Equalized Company pays all | Uneven Insuring older/less-healthy owners costs more | Fair Each pays for own coverage |
| Estate-tax / Connelly exposure | Higher Proceeds can inflate company value | Lower Proceeds bypass the company | Lower Proceeds stay outside the entity |
| Basis step-up for survivors | No Basis unchanged | Yes Full step-up on purchased shares | Yes Cross-purchase mechanics |
| Creditor protection | Weaker Reachable by business creditors | Stronger Held individually | Stronger Owner controls the policy |
| Portability if owner leaves | Low Business owns it | Limited Others own it | High Owner keeps their own policy |
| Administrative complexity | Lowest | Medium | High Split-dollar paperwork |
| Best fit | 3+ owners wanting simplicity, modest estates | 2–3 owners focused on tax efficiency | Owners wanting one policy each and tax efficiency |
A growing post-Connelly alternative is the special-purpose insurance LLC: a separate LLC owns one policy per owner and distributes proceeds so surviving owners buy the shares — delivering cross-purchase tax results (step-up, proceeds outside the operating company) without policy proliferation. It adds a separate partnership tax return and its own drafting considerations.
How buy-sell agreements are funded
A signed agreement is only a promise until it's funded. Insurance turns a small annual premium into the exact lump sum needed the day a trigger hits — for both death and disability.
Life insurance
Delivers a tax-free lump sum the moment a death triggers the buy-out.
Most commonDisability buy-out
Funds the purchase when an owner is permanently unable to work.
Living triggerBoth, combined
Layer life and disability coverage so every exit is funded.
Most completeOne ruling worth knowing: the 2024 Supreme Court decision in Connelly v. United States changed how company-owned life insurance is valued for estate tax. Each structure handles it differently — the detail (and citations) lives on each structure's page.
Size the funding for your structure
We don't just explain buy-sells — we help you build one. The guided calculators value your business five ways and size the exact coverage an approach requires, then connect you to instant-decision quotes — and where a calculator is still in the works, the structure itself is covered in full.
Entity Purchase
Values your business five ways and sizes the coverage the company should carry on each owner to fund a redemption.
How this structure works →Cross-Purchase
Sizes the coverage each owner needs on the others, so every survivor can fund their share of the buy-out directly.
Open calculator →Own-Your-Own Policy
Sizes each owner's own-life policy and the benefit endorsed to co-owners to fund the buy-out.
How this structure works →- ✓ Values your business 5 ways: EBITDA multiple, book value, capitalization of earnings, excess-earnings, and a blended figure
- ✓ Sizes per-owner coverage based on each owner's percentage
- ✓ Flags any policy set below the calculated need
- ✓ Connects straight to instant-decision quotes
Find the structure that fits
Explore each approach in depth, then size your funding and get an instant-decision quote.