A buy-sell agreement controls ownership transfers after death, disability, departure, dispute, or another trigger and defines price, buyer, funding, and closing terms.
A buy-sell agreement is a contract that specifies when an owner must or may transfer a business interest, who can buy it, how the price is determined, and how the purchase is funded and completed. It is used by closely held corporations, partnerships, and other private businesses to manage death, disability, retirement, termination, deadlock, divorce, bankruptcy, or voluntary sale.
The agreement supports continuity, but it does not guarantee liquidity, a fair valuation, or tax treatment. Those outcomes depend on precise drafting, current funding, and applicable law.
Connelly decision.An agreement can address:
Each trigger needs a definition, notice process, valuation date, and closing timetable. “Disability” is especially risky when it lacks an objective duration or medical determination procedure.
| Structure | Buyer | Typical funding source | Central issue |
|---|---|---|---|
| Cross-purchase | Remaining owners | Owner-held insurance, cash, or borrowing | Multiple buyers and unequal funding capacity |
| Entity redemption | Company or partnership | Entity cash, insurance, or debt | Solvency, lender restrictions, and entity valuation |
| Hybrid or wait-and-see | Entity first, owners second, or later election | Combination | Flexibility but more drafting complexity |
| Third-party right of first refusal | Existing owners or entity can match outside offer | Buyer financing | Bona fide offer and matching terms |
The arrangement should identify who owns insurance, who pays premiums, who receives proceeds, and who is obligated to buy.
Assume a company has three shareholders:
The agreement values the whole company at $6 million. A dies, making A’s stated purchase price $3 million. The company owns a $2.5 million policy on A.
The insurance proceeds leave a $500,000 funding gap before tax, transaction, and working-capital effects. The company might use cash reserves, borrow, negotiate installments, or fail to close on time.
The example shows why insurance amount and valuation method must be reviewed together. A policy purchased years earlier does not automatically remain sufficient.
Owners state a dollar value and update it periodically. This is simple but dangerous if the last signed value is several years old.
The price may use revenue, EBITDA, book value, net asset value, or another measure. The agreement should define:
One or more independent valuers estimate the interest under a defined standard and premise of value. The agreement should address expert selection, information access, fees, deadlines, and disagreement procedures.
“Fair value,” “fair market value,” “book value,” and “agreed value” are not interchangeable. The document should state whether control premiums, minority discounts, marketability discounts, debt, and key-person effects apply.
A formula can produce an exact number while still measuring the wrong thing. The price should be tested against the purpose of the transaction and applicable tax or corporate rules.
In Connelly v. United States (2024), the U.S. Supreme Court held that, for the facts before it, company-owned life-insurance proceeds used to redeem a deceased shareholder’s stock increased the corporation’s value, and a contractual obligation to redeem shares at fair market value did not offset that value.
The decision does not determine every buy-sell valuation or tax result. It does mean that entity-owned insurance and redemption obligations require coordinated estate, tax, insurance, and valuation review rather than a simple assumption that proceeds and obligation cancel.
If the price is paid in installments, the agreement should define:
An estate that accepts a long note becomes a creditor of the buyers or company and bears repayment risk.
A buy-sell agreement should align with:
Conflicting documents can delay a transaction precisely when the business is under stress.
This article provides general corporate-finance education, not contract, estate, tax, insurance, valuation, securities, or legal advice. Obtain coordinated advice for the governing jurisdiction and owner circumstances.