Without a buy-sell agreement, your partner’s share of the business usually passes to their estate, often to a spouse or children. You want to keep running the company. The family wants cash. A funded buy-sell agreement settles in advance who buys the share, at what price, and where the money comes from.
A partner dies on a Tuesday. By Friday the estate owns a third of the company. Without an agreement that sets the price and the terms, both sides have a legitimate claim and no clean way to resolve it.
An unfunded buy-sell is a document, not a plan.
What is a buy-sell agreement?
It is a contract between co-owners that sets the terms when ownership changes: who must sell, who must buy, at what price and how it will be paid for. It is agreed on a day when everyone is calm enough to be fair.
What should a buy-sell agreement cover besides death?
Most agreements cover death and skip the more likely events. The missing ones are the ones that end up in court.
- Disability. One fewer partner is working, but ownership and profit shares have not changed. A disability buyout pays the disabled partner a set price and keeps the business fair to those still working.
- Divorce. A court can award part of a partner’s share to an ex-spouse, leaving you in business with someone you never chose. The agreement can give the partners the right to buy that share back at the agreed value.
- Retirement or leaving. A partner who wants out at 62 can trigger a buyout the business cannot pay for on short notice. Building it into the agreement creates the lead time.
- Personal bankruptcy. A creditor who takes a partner’s share creates the same unwanted-partner problem as a divorce.
How is a buy-sell agreement paid for?
There are three sources: savings, borrowing and insurance. The right one depends on whether the event comes with warning.
- Death and disability come without warning, and the buyout is due right away. Insurance is the only source that produces the money the day it is needed. Borrowing means the surviving partners take on personal debt just as the business is absorbing the loss.
- Retirement, divorce and bankruptcy come with some runway. Savings built from profits, cash-value life insurance, a payout over time or a line of credit can be matched to the timeline.
The agreement should name the funding source for each event. The most common mistake is to insure the death trigger and leave a disability buyout to cash flow.
Cross-purchase or entity redemption: which is better?
Both transfer the share in full. They differ in taxes and paperwork.
An illustration from Financial Fortress for Business Owners: Eric and the Davids. Three equal partners own a consulting firm worth $6 million, taxed as a partnership. Each share is worth $2 million, and each partner’s original cost basis is $500,000. One partner dies.
| Cross-purchase | Entity redemption | |
|---|---|---|
| Who owns the policies | Each partner owns a policy on each other partner (six policies for three partners) | The business owns one policy on each partner |
| After the buyout | Each survivor owns 50% of a $6 million business | Each survivor owns 50% of a $6 million business |
| Each survivor’s cost basis | $1.5 million | $500,000 |
| Effect on a later sale | Less capital gains tax | More capital gains tax |
| Paperwork | Grows quickly with each partner added | Simpler |
Illustrative composite from the book, not a client. Partnership tax rules shown; corporations face different rules on transferring policies between owners. Review the structure with your CPA and attorney.
Cross-purchase gives a better tax result. Entity redemption is simpler to run, and the business pays the premiums evenly, which matters when one partner is older or less healthy and their policy costs more.
How often should the business be valued for a buy-sell?
Every two to three years, with the insurance adjusted to match. Note too that after a first death, each survivor owns more of the business but the policies on them have not grown. A stale value or a stale policy leaves an agreement that pays for only part of the buyout it was meant to fund.
What happens to the business if there is no buy-sell agreement?
The partner’s share passes through their estate, and the rules that apply depend on how the business is set up:
- Partnership: state law and the partnership agreement decide whether the partnership continues. Without terms, the estate may be owed the value of the share, on its own timeline.
- LLC: the operating agreement governs. Without one, heirs usually receive the economic rights, a share of profits, without a vote, and the surviving members still have to deal with them.
- Corporation: the shares pass to the heirs with full voting rights. In an S corporation, a share that passes to an ineligible owner can end the S election for everyone.
In each case the executor controls the share while the estate is settled, which can take months, and the executor’s duty is to the family, not the business.
What should the surviving partners do first?
- Read the buy-sell agreement and the partnership or operating agreement.
- File the insurance claims named in the agreement.
- Bring in the company’s attorney and CPA, and confirm who can sign for the bank accounts.
- Speak with the executor and the family early, and in writing where the agreement requires it.
- Tell employees, key clients and lenders who is running the business.
- Start the valuation using the method the agreement names.
How is the business valued for a buy-sell agreement?
The agreement names a method. Common choices are a fixed value agreed between the partners, a multiple of revenue or earnings, or an independent appraisal. An agreed value is simple but goes stale. An appraisal costs more but is hard to dispute.
Does the Connelly decision change how a buy-sell should be funded?
It can. In Connelly v. United States (2024), the Supreme Court held that life insurance a corporation receives to buy back a deceased owner’s shares counts toward the company’s value for estate tax, with no reduction for the obligation to buy the shares. For owners with larger estates, an entity redemption funded by company-owned insurance can raise the estate tax bill. A cross-purchase avoids the issue. Agreements written before 2024 are worth a review.
Frequently asked questions
Does a deceased partner’s spouse become a partner?
Not automatically. Without a buy-sell agreement, the spouse or estate usually inherits the economic value of the share, and depending on the business type may gain voting rights too.
Who pays for a buy-sell agreement?
Usually life and disability insurance. In a cross-purchase each partner owns policies on the others; in an entity redemption the business owns them.
How long does a buyout take after a partner dies?
With a funded agreement, often weeks: the insurer pays and the share is bought at the agreed price. Without one, it can take months or longer while the estate is settled.
Questions to ask your advisor
- Is my buy-sell agreement funded for each event: death, disability, divorce, retirement and personal bankruptcy?
- When was the business last valued, and does the insurance match that value?
- Has anyone calculated the tax difference between cross-purchase and entity redemption at our current ownership shares?
More for business owners: How do I maximize the value of my business? · What is the best retirement plan for a business owner? · How insurance can fund a buyout
Related questions
Want your buy-sell agreement checked against today’s value?
Schedule a conversation or read Chapter 1 of Financial Fortress for Business Owners.
This page is general education, not tax, legal or investment advice for your situation. Buy-sell agreements should be drafted by an attorney and reviewed with your CPA. Ira Koyner is a licensed insurance agent and may earn a commission on insurance products. Triathlon Partners LLC is a registered investment adviser in Connecticut and New York. Registration does not imply a certain level of skill or training.