Buy-Sell Agreement Planning

A Buy-Sell Agreement provides a legally binding plan for the transfer of a business interest after a triggering event. It protects both business continuity and the financial security of the owner’s family.

Triggering Events Include:

• Death
• Disability
• Retirement
• Bankruptcy or Divorce
• Termination of employment

Core Benefits of Buy-Sell Agreements

Provides Liquidity

Immediate cash flow to the deceased or disabled owner’s family.

Guaranteed Market

Creates a predetermined buyer for the business interest.

Avoids Outside Interference

Prevents unwanted third parties from entering the business.

Predetermined Value

Establishes clear valuation methods and terms of sale.

Types of Buy-Sell Agreements

Entity Purchase (Stock Redemption)

The business buys back the departing owner’s shares.

Best for: Single owners or when business has excess cash.

Cross Purchase

Co-owners buy each other’s shares directly.

Best for: 2-3 owners with similar financial capacity.

Wait-and-See

Business has first right to buy; if not, other owners can.

Best for: Provides flexibility for changing business conditions.

One-Way

Used when a third party (like a key employee) buys out the owner.

Best for: Succession planning to key employees.

Funding Your Buy-Sell Agreement

Funding method is critical — without proper funding, even the best agreement fails.

Life Insurance (Preferred)

Pros:

• Funds immediately upon death or disability
• Tax-efficient payout
• Guaranteed availability

Cons:

• Premiums required
• Needs maintenance and review

Sinking Fund (Moderate)

Pros:

• Build over time
• Stable asset

Cons:

• May be underfunded at trigger time
• Subject to creditors

Installments (Moderate)

Pros:

• Seller gets ongoing payments
• Lower upfront cost

Cons:

• Delays liquidity
• Relies on new owner’s performance

Cash/Loans (Limited)

Pros:

• Simple (cash)
• No upfront cash needed (loans)

Cons:

• Often unavailable when needed
• May not qualify for loans

Life Insurance: The Preferred Funding Solution

Why Life Insurance is Most Common:

How It Works:

• A policy is purchased on each owner
• Death benefit is used to buy out shares
• Cash value may be used for retirement/disability
• Buy-sell documents reference the policies

Key Benefits:

• Tax-free death benefit (IRC §101)
• Immediate liquidity when needed
• Smooth ownership transition
• Guaranteed funding availability

Important: Connelly v. United States (2024)

Supreme Court Decision Impact: When a stock redemption is funded with life insurance, the insurance death benefit increases the business’s value, which increases the deceased owner’s estate.

Planning Consideration: This may create higher estate taxes. Planners must now account for this when using Entity Purchase methods.

Is Your Business Ready for Buy-Sell Planning?

Business Types:

• C-Corporation
• S-Corporation
• Limited Liability Company (LLC)
• Partnership
• Sole Proprietorship

Owner Goals:

• Create liquidity for family
• Secure a guaranteed buyer
• Reward key employees
• Plan for retirement/disability
• Maintain business continuity

Ready to Secure Your Business Future?

Don’t leave your business succession to chance. Let’s create a comprehensive buy-sell strategy that protects your business and your family’s financial security.