How Healthy Is Your Buy-Sell Agreement? 

Most business owners wouldn’t dream of operating without insurance on key assets like property coverage or liability protection. But if your company has more than one owner, there’s another type of protection that’s just as essential: a buy-sell agreement. 

A well-structured buy-sell agreement protects both the business and its owners when major life events happen such as retirement, disability, or the death of an owner. Without one, disputes can arise, valuations can be challenged, and in some cases, the stability of the company itself may be at risk. 

So, how do you know if your buy-sell agreement is truly healthy? Four areas deserve a closer look: whether your funding is still appropriate, if your valuation is current and clearly defined, how recent legal changes like the Connelly ruling may affect your plan, and whether the agreement itself is customized to fit your business today. 

Revisit Your Funding 

Many agreements are funded through life insurance or disability buyout insurance, ensuring the business has the liquidity to fulfill its obligations when an owner exits. The two most common structures are: 

1. Cross-Purchase Agreement 
Each owner buys insurance on the others. If an owner leaves or passes away, the surviving owners use the policy proceeds to purchase the departing owner’s shares. This arrangement allows the buyers to receive a step-up in cost basis, potentially lowering future taxes if the business is sold. Cross-purchase agreements typically work best when there are three or fewer owners. 

2. Entity-Purchase Agreement 
The business itself purchases policies on each owner. When triggered, the company buys back the departing owner’s shares and redistributes them among the remaining owners. While this method doesn’t provide a step-up in basis, it’s generally more practical when there are four or more owners since it avoids a web of multiple policies. 

Keep Your Valuation Current 

The heart of a buy-sell agreement is the valuation. Outdated or vague valuations can create conflict when the agreement is triggered. Engaging a professional valuator ensures fairness and provides clarity for everyone involved. 

Regular updates are critical, especially if the business has grown, taken on debt, or shifted its strategy. Equally important is how the agreement defines the “standard” of value—terms like fair market value, fair value, book value, or investment value can produce very different results. The right standard often depends on the triggering event, so clarity here helps avoid disputes later. 

Understand the Impact of the Connelly Ruling 

A recent Supreme Court ruling (Connelly v. United States, 2024) has introduced an important consideration for buy-sell agreements funded with life insurance. The Court held that life insurance proceeds used to redeem a deceased owner’s shares must be included in the company’s value for estate tax purposes, even though those proceeds are earmarked to buy out the departing owner. 

For business owners, this means: 

• Your company’s taxable value may be higher than expected at an owner’s death. 

• The intended liquidity from life insurance may not be enough to cover both the redemption and potential estate taxes. 

• Regular reviews with both your CPA and estate planning advisor are essential to avoid surprises. 

Customize Your Agreement 

A one-size-fits-all buy-sell agreement can do more harm than good. Each business is unique, and so are the goals of its owners. Your agreement should be tailored to reflect ownership percentages, succession plans, and tax considerations. Most importantly, it should be a living document that is reviewed every few years or whenever ownership or circumstances change. 

Bringing It All Together 

Your buy-sell agreement is more than a legal document, it’s a safeguard for your business, your co-owners, and your family. Treat it with the same care as you would your homeowner’s insurance, retirement plan, or succession strategy. 

If you’d like to review your current agreement or create one that reflects today’s best practices and the latest legal guidance, we can help you put the right protections in place.