Buy-Sell Agreement Basics: Who Gets Your Business If You Can’t Run It?

Most business owners have a will. Far fewer have answered the question that matters most for what they’ve built: what happens to the business itself if they’re suddenly not there to run it. For any company with more than one owner, the answer usually starts with a buy-sell agreement, and for every closely held business, it ends with a plan for who keeps the doors open on Monday morning.

At a glance

• A will decides who inherits your ownership stake. It doesn’t decide who runs the business, who can buy your share or how that purchase gets paid for.
• A buy-sell agreement sets the buyer, the price and the funding in advance, so a death, disability or departure doesn’t turn into a negotiation.
• An agreement only works if it’s funded, current and coordinated with your personal estate plan.

Why your will isn’t a business succession plan

It’s an easy gap to miss, because a personal will and a business succession plan feel like they should be the same conversation. They’re not. A will tells the world who inherits your ownership. It says almost nothing about who actually runs the company, how a transition gets funded or what happens to the employees and partners who were counting on you.

Say you own a business and something happens to you unexpectedly. Your will might name your spouse or your kids as the new owners. But owning a business and running one are very different skill sets, and your will has nothing to say about which one your heirs have.

Without a separate plan, a few things tend to happen at once:

• The business loses its most important relationships and know-how overnight.
• Surviving partners can end up legally tied to heirs who have no interest in, or ability to, run the company.
• The business, often a family’s largest asset, can lose value quickly at exactly the moment it needs to hold that value for the people inheriting it.

That last point is bigger than most owners realize. The Exit Planning Institute notes that a business typically makes up 80% or more of its owner’s total net worth.

What is a buy-sell agreement?

A buy-sell agreement, sometimes called a buyout agreement or business continuation agreement, is a legal contract between the owners of a business. Ideally drafted long before it’s needed, it spells out what happens to an owner’s share if they:

• Die
• Become disabled
• Retire or leave the business
• Divorce
• Can’t resolve a serious disagreement with the other owners

For each of those events, the agreement answers three questions: who has the right or obligation to buy the share, at what price and with what money. Settling those answers in advance removes the guesswork, and the potential for conflict, at the moment guesswork is most dangerous.

It also protects both sides. Your family gets a fair price and cash instead of a stake in a company they can’t control. Your partners keep control of the business without having to negotiate with your heirs.

Types of buy-sell agreements

There are two main structures, plus a hybrid that combines them.

	Cross-purchase agreement	Entity redemption agreement
Who buys the departing owner’s share	The other owners, personally	The business itself
Who typically owns the life insurance	Each owner, on each other owner	The business, on each owner
Number of policies	Grows quickly as owners are added	One per owner
Tax considerations	Surviving owners generally get a higher cost basis in the shares they buy	Simpler to administer, but insurance proceeds can raise the company’s value for estate tax purposes (see below)
Often a fit for	Two or three owners	Businesses with more owners

A hybrid, or “wait-and-see,” agreement lets the business and the remaining owners decide which one buys the share at the time it’s needed. That flexibility can help when it’s hard to predict which structure will make more sense years from now.

The right structure depends on how many owners there are, how the business is taxed, the owners’ ages and health and their personal estate plans. That’s a decision for your attorney and CPA to make with you, and it’s worth revisiting as the business changes.

How the price gets set

A buy-sell agreement is only as fair as the price it uses. Most agreements set value in one of three ways:

• A fixed price the owners agree on and update periodically. Simple, but it goes stale fast if no one updates it.
• A formula, such as a multiple of earnings or book value. Easier to keep current, but it may not reflect what the business is actually worth.
• An independent appraisal at the time of the triggering event. Usually the most accurate, though it takes more time and cost.

Whichever method you choose, revisit it. A price set ten years ago can leave your family underpaid, or leave your partners overpaying, at the worst possible time.

How to fund a buy-sell agreement

An agreement that promises to buy your share is only as good as the money behind it. Common ways to fund a buyout include:

• Life insurance, which provides cash when it’s most needed without draining operating capital or forcing a fire sale of business assets.
• Disability buyout insurance, which funds a purchase if an owner can no longer work. A long-term disability is often more likely than an early death, and it’s easy to overlook.
• Installment payments made over several years, often backed by a promissory note. These keep cash in the business, but they leave the seller’s family depending on the company’s future success.
• Cash or a sinking fund set aside inside the business over time.

Why the Connelly decision matters

In Connelly v. United States (2024), the U.S. Supreme Court ruled unanimously that life insurance proceeds a corporation receives to redeem a deceased owner’s shares count toward the company’s value for estate tax purposes. The company’s obligation to buy back the shares doesn’t offset them. In that case, the deceased owner’s estate was assessed $889,914 in additional estate tax.

The ruling doesn’t make entity redemption agreements wrong. It means that if your business uses corporate-owned life insurance to fund a buyout, it’s worth having your attorney and CPA review how the agreement is structured, especially if your estate could be large enough to owe estate tax.

Key person insurance: a different risk

Key person insurance (sometimes called key employee insurance) is separate from an ownership transfer. It addresses what happens to revenue and operations if a critical person becomes unable to work. That might be an owner, but it could just as easily be a top salesperson or the one engineer who knows how everything works.

The business owns the policy and receives the benefit, which gives it a financial bridge to recruit, retrain or reassure lenders and customers while it adjusts.

Build a business continuity plan

Beyond the legal and financial mechanics, every business needs a practical plan for the first few weeks after an owner is suddenly gone. A business continuity plan answers questions like:

• Who has authority to sign checks, approve payroll and make decisions?
• Where are the passwords, contracts, bank accounts and key documents?
• Who calls your most important clients, lenders and suppliers, and what do they say?
• Is there enough cash on hand to cover operations while ownership is sorted out?
• Who is being prepared to lead, and on what timeline?

The longer-term version of this, who’s being groomed to lead, when and how it’s communicated to family, partners and key employees, is your succession roadmap.

Three paths for your business, and why the choice matters

Passing the business to family only works if the next generation wants to run it and has been given the time and mentorship to be ready. Wanting to inherit a business and being prepared to run one are not the same thing, and confusing the two is one of the more common succession mistakes.

Selling to a co-owner, key employee or management team keeps continuity and know-how intact. But it requires a purchase the buyer can afford, often paid over time, which takes advance planning to fund.

Selling to an outside buyer can maximize the financial outcome for the owner. But it requires a business that’s truly sellable, meaning it doesn’t depend entirely on the owner to generate its value. That’s often a multi-year project to build toward, not something that can be arranged after the fact.

None of these paths is automatically better. The mistake is not choosing deliberately and letting the business drift into whichever path happens by accident.

Coordinate it with your personal estate plan

Business succession and personal estate planning have to be built together. If your will leaves the business to your kids but your buy-sell agreement gives your partner the right to buy them out, those two documents are working against each other.

A few places to check for conflicts:

• Who receives the sale proceeds. Should the money go to your spouse outright, or into a trust? Our post on wills vs. trusts explains the difference.
• Who owns the life insurance. How a policy is owned can affect both your estate tax picture and who controls the money.
• Fairness among your children. If one child takes over the business and another doesn’t, how will your estate plan treat them both fairly?
• Whether your family knows the plan. Even a well-drafted plan can cause conflict if it comes as a surprise. We make the case for having that talk in The Estate Planning Conversation Most Families Avoid.

If your company stock makes up most of what you own, the same concentration risk we describe in What Diversification Actually Means applies to you, too.

How often to review your buy-sell agreement

Plan on reviewing your agreement every few years, and any time something significant changes: a new owner, a big jump in the company’s value, a change in tax law, a divorce or a health change.

Many owners already have an agreement but haven’t kept it current. In the Exit Planning Institute’s 2023 national survey of 1,162 business owners, 68% said they had a written buy-sell agreement, but only 51% said theirs had been updated within the last three years.

Where we fit in

We don’t draft buy-sell agreements or legal documents ourselves. What we do is coordinate directly with your estate attorney, your accountant and your business advisors so your business succession plan and your personal estate plan are built to work together, not around each other.

Frequently asked questions

Talk it through with us

If you’ve built something worth preserving for the next generation, the plan for who runs it next deserves the same intention you put into building it. Book a 20-minute Fit Call. It’s virtual, no prep is needed and there’s no obligation.

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