Glossary

Buy-sell agreement

A contract among a business's owners that sets who can buy a departing owner's share, at what price, and how the purchase is funded.

Also called: buy and sell agreement, business continuation agreement, buyout agreement, shareholder agreement buyout

A buy-sell agreement tells the owners of a closely held business what happens to an ownership interest at a triggering event: death, disability, retirement, divorce, bankruptcy or a decision to leave. It names who may or must buy, the price or valuation formula, and the funding. It keeps an heir or ex-spouse from becoming your business partner and gives the family a guaranteed buyer.

The two basic structures are a cross-purchase agreement, where surviving owners buy, and an entity redemption, where the company buys. Life insurance is the usual funding for death, and disability buyout insurance for disability. Say two equal owners value their company at $4 million. Each owns a $2 million policy on the other, so the survivor has cash to buy the estate's half.

Agreements fail when valuations go stale, funding is missing or premiums stop tracking value. After Connelly v. United States (U.S. Supreme Court, 2024), life insurance proceeds a company receives to fund a redemption count toward the company's value for federal estate tax, because the obligation to redeem is not a liability that offsets them. Many owners have reviewed redemption funding since, and tax advice matters. See Funding a buy-sell agreement with life insurance after Connelly for funding options and the buy-sell agreement funding calculator for the arithmetic.

Last reviewed October 10, 2026

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Related terms

Cross-purchase agreement A buy-sell arrangement in which each surviving owner personally buys a departing owner's share, usually funded by life insurance the owners hold on one another. Entity redemption A buy-sell arrangement in which the business itself buys a departing owner's interest, usually funded by company-owned life insurance on each owner. Key person insurance Life or disability insurance a business owns on a critical owner or employee, paid to the business to offset the financial hit of losing that person. Insurable interest A real financial stake in the thing insured, such that you would lose money if it were damaged or a person died; without one a policy generally cannot pay. Split-dollar arrangement An agreement in which two parties, usually an employer and an executive or a company and its owner, divide a life insurance policy's premiums and benefits.

Related guides

Annuities for business owners: where they fit and how they are taxed Where annuities appear in business planning, from retirement plans to buyout payments, with the tax mechanics of IRC 72 and the rule on entity-owned annuities. How insurers underwrite business life insurance How insurers underwrite key person, buy-sell and other business-owned life policies: financial justification, medical review, risk classes and delays. Business succession planning and the insurance that funds it How a succession plan uses buy-sell agreements, life and disability insurance and key person coverage to transfer a closely held business smoothly. Funding a buy-sell agreement with life insurance after Connelly Funding a buy-sell with life insurance, disability buyout cover or a sinking fund, and how Connelly v. United States (2024) affects entity redemptions. Collateral assignment of life insurance for business loans How a collateral assignment pledges a life policy to a lender, what rights the lender gets, how it differs from an absolute assignment, and the release. Cross-purchase vs entity redemption buy-sell plans Compare cross-purchase and entity-redemption buy-sell structures on policy count, basis, creditor risk and estate tax after Connelly v. United States (2024).

Related tools

Buy-sell agreement funding calculator Shows how many life insurance policies a cross-purchase or entity-redemption buy-sell plan needs, and the face amount of each, for up to six owners. Key person insurance calculator Size key person life insurance four ways, from compensation, lost profit, replacement cost and loans, and see a range and a suggested amount with the reasoning.