Ownership transition, funded
Buy-Sell Agreements
Insurance-funded succession contracts that keep ownership stable when a trigger event happens.
Overview
A buy-sell agreement is a legally binding contract between business owners that controls what happens to an owner's interest when they die, become disabled, retire, or otherwise leave the business. It names who may buy the departing owner's interest, at what price or pricing formula, and on what terms.
Our role is twofold. First, we advise on design: the triggering events, the valuation clause, cross-purchase versus entity redemption structure, and how the funding mechanism fits the ownership count and tax situation. Second, we fund the agreement with life insurance and, where appropriate, disability buyout coverage so the cash is there when a trigger occurs. The agreement itself is drafted by your attorney, not by our firm.
Most closely held businesses pair a buy-sell with permanent or term life insurance on each owner, sized to the current valuation and reviewed as the value changes. Disability buyout policies can cover the disability trigger, which is statistically more common than death during working years but often left unfunded.
Insurance policies used to fund a buy-sell are subject to underwriting. Issuance, coverage amount, and premium are not guaranteed and depend on the insured's health, financial, and other factors assessed by the insurance carrier. Any benefit paid is backed by the claims-paying ability of the issuing company.
How We Help
Two-owner partnership
A cross-purchase structure where each owner owns a policy on the other to fund the purchase of the departing interest.
Three-or-more-owner companies
An entity-purchase or trusteed cross-purchase approach to avoid the policy-count growth of traditional cross-purchase.
Family-owned business with active and inactive heirs
Designing buyouts that move ownership to the children working in the business while providing liquidity to those who are not.
Disability buyout funding
Adding disability buyout insurance so a long-term disability triggers a funded buyout instead of a stalled company.
Key owner with outside investors
Structuring a buy-sell that gives investors defined exit mechanics without forcing a fire-sale on a trigger event.
Outdated agreement review
Revisiting valuation clauses, funding levels, and trigger definitions in agreements that haven't been touched in years.
S-corporation ownership continuity
Aligning the buy-sell with S-corp eligibility rules so a trigger event doesn't jeopardize the S election.
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Learn moreFrequently Asked Questions
What is a buy-sell agreement?
A buy-sell agreement is a legally binding contract between business owners that dictates how an owner's interest is transferred when a defined trigger event occurs. Triggers commonly include death, long-term disability, retirement, divorce, bankruptcy, and voluntary departure. The agreement sets the price or pricing method and the terms of the buyout.
Does your firm draft the buy-sell agreement?
No. Our firm does not draft legal documents. Your attorney drafts the buy-sell agreement. We advise on the design choices and structure the life and disability insurance funding that stands behind it.
How does life insurance fund a buy-sell agreement?
Life insurance provides the cash to execute the purchase when an owner dies. The policy is owned either by the other owners (cross-purchase) or by the business (entity purchase), with the death benefit used to buy the deceased owner's interest at the price the agreement specifies. Policy issuance and pricing are subject to underwriting.
Cross-purchase or entity purchase: which structure should I use?
It depends on the number of owners, the tax basis consequences, and the ownership mix. Cross-purchase generally gives surviving owners a stepped-up basis in the purchased interest but can require many policies as owner count grows. Entity purchase is simpler to administer but has different tax basis outcomes. We model both with your CPA before recommending.
What triggers a buy-sell agreement?
Common triggers are death, long-term disability, retirement, termination of employment, divorce, personal bankruptcy, and voluntary transfer attempts. The agreement defines each trigger and the mechanics that follow. Not every agreement uses every trigger.
How often should a buy-sell be reviewed?
Review it at least every two to three years and after any material change in business value, ownership, or key personnel. Outdated valuation clauses and under-funded insurance are the two most common problems we see in older agreements.
Can disability trigger a buy-sell?
Yes, if the agreement defines disability as a trigger and funding is in place. Disability buyout insurance is the funding mechanism most commonly used for this trigger. Definitions of disability and elimination periods vary by policy and are set during underwriting.
What happens if the buy-sell is not funded?
The surviving owners or the business must find the purchase price from cash, borrowings, or installment payments to the departing owner or their estate. Unfunded buy-sells often default to installment buyouts that strain operating cash flow or end in renegotiation. Insurance funding is designed to prevent that outcome, subject to the issuing company's claims-paying ability.
Important Disclosures
- We do not provide legal advice. Buy-sell agreements are legal contracts that should be drafted, reviewed, and executed by qualified legal counsel engaged by the business and its owners.
- Tax implications of a buy-sell agreement — including entity-level vs. cross-purchase structures, basis adjustments, and valuation-clause treatment — depend on the specific facts and should be evaluated with the client's CPA or tax attorney.
- Insurance used to fund a buy-sell agreement is subject to medical, financial, and underwriting approval. Policy availability, premium rates, and issue amounts are not guaranteed.
- Policy guarantees are backed solely by the claims-paying ability of the issuing insurance company.
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