Buy-Sell Agreements: Best Need to Know Terms and Facts Now

In the landscape of business partnerships, few documents are more critical to long-term success and organizational stability than the Buy-Sell Agreement. Whether you’re a small business owner, a co-founder of a fast-growing startup, or a financial advisor helping clients navigate succession planning, understanding how buy-sell agreements work is essential to protecting the future of the business and the legacy of its owners.

In this article, we’ll explore the fundamentals of buy-sell agreements—what they are, why they matter, the various structures they can take, and how to ensure yours is aligned with both business goals and personal planning. We’ll also highlight how life insurance and life settlements can enhance the value and flexibility of your buy-sell strategy.

🔍 What Is a Buy-Sell Agreement?

A Buy-Sell Agreement is a legally binding contract between business co-owners that governs what happens if one of them leaves the business, whether through retirement, disability, voluntary exit, bankruptcy, divorce, or death. It lays out how ownership interests are to be transferred, how the business will be valued, and how the transaction will be funded.

In essence, it acts as a business prenup—a contingency plan that keeps the company running smoothly no matter what happens to its stakeholders.

💼 Why Are Buy-Sell Agreements So Important?

Without a clear Buy-Sell Agreement in place, the exit of a business owner can trigger:

• Legal battles between heirs and remaining partners

• Unwanted third-party involvement in the business

• Valuation disputes over how much the business (or the exiting owner’s share) is worth

• Cash flow strain when funding a sudden buyout

• Loss of leadership, expertise, or continuity

A well-designed agreement minimizes these risks by establishing a fair and predictable process for all parties involved.

⚖️ Types of Buy-Sell Agreements

There are three primary types of Buy-Sell Agreements . Each has unique features and is suited to different ownership structures and funding strategies:

1. Cross-Purchase Agreement

Each owner agrees to purchase a departing owner’s share. This model is ideal for businesses with few owners and is often funded by individual life insurance policies each owner takes out on the others.

Pros:

• Ownership stays with individuals

• Potential tax benefits from stepped-up basis

Cons:

• Becomes complex with more than a few owners

• Each owner must qualify for insurance

2. Entity-Purchase Agreement (Redemption Agreement)

The business itself buys back the departing owner’s shares using company-owned life insurance or company funds.

Pros:

• Simpler in businesses with many partners

• Centralized funding and control

Cons:

• Remaining owners don’t receive stepped-up basis

• May impact business’s financials

3. Wait-and-See Agreement

This hybrid allows the company the first right of refusal to buy the interest. If it declines, the remaining partners can step in to make the purchase.

Pros:

• Offers flexibility based on financial or strategic conditions at the time

• Accommodates evolving business dynamics

Cons:

• Requires coordination and planning at execution time

• May cause delays or confusion without clear communication

📝 Key Terms and Considerations

When drafting or updating a buy-sell agreement, pay close attention to the following elements:

• Triggering Events – Specify what circumstances activate the agreement (e.g., death, disability, retirement, divorce, insolvency).

• Valuation Method – Decide how the business will be appraised. Options include fixed price, agreed formula (e.g., EBITDA multiple), or third-party valuation.

• Funding Mechanism – Identify how the buyout will be financed (e.g., life insurance proceeds, installment payments, business reserves, third-party loans).

• Ownership Transfer Restrictions – Prevent unwanted individuals or competitors from gaining ownership by requiring approval for any transfer.

• Tax Treatment – Collaborate with legal and tax advisors to minimize negative tax consequences and take advantage of potential deductions or exclusions.

💡 Life Insurance and Buy-Sell Agreements

Life insurance is one of the most effective tools for funding Buy-Sell Agreements —particularly for death or disability scenarios. Policies are structured so the company (or co-owners) can immediately access capital to buy the deceased or incapacitated owner’s share, preventing financial disruption.

But what happens when the agreement is terminated or a partner retires? The life insurance policy might no longer be needed—but it still holds value. This is where life settlements come in.

💵 The Life Settlement Advantage

If your company holds life insurance policies it no longer needs, those policies may be eligible for a Life Settlement, allowing you to sell them on the secondary market for a lump-sum cash payout—often far greater than the policy’s surrender value.

At Summit Life Settlements, we help business owners and partners explore life settlement options for policies originally used to fund buy-sell agreements. Instead of letting policies lapse or surrendering them for a small return, you can unlock hidden value and reallocate capital to other business or estate planning needs.

✅ Final Thoughts

A well-executed buy-sell agreement can mean the difference between smooth succession and business chaos. It provides peace of mind to owners, clarity to successors, and confidence to employees and clients.

Whether you’re designing your first agreement or reviewing an existing one, remember to involve legal, financial, and insurance professionals—and don’t overlook the value of unused life insurance policies. In the right circumstances, a life settlement can turn dormant coverage into a strategic asset.

Why Consider a Life Settlement for a Buy-Sell Agreement?

When a life insurance policy used to fund a Buy-Sell Agreement is no longer needed, it doesn’t have to go to waste. Instead of allowing the policy to lapse or surrendering it for a fraction of its potential value, a life settlement offers an opportunity to turn an inactive or outdated policy into a significant financial asset.

Here’s why many business owners and advisors are leveraging life settlements as part of their succession or financial planning strategy:

✅ The Policy Has Outlived Its Purpose

Life insurance policies are often put in place to fund a buyout if a partner dies, ensuring business continuity and protecting both the remaining owners and the deceased partner’s family. However, over time, the business may undergo major changes—partners retire, companies merge or are sold, or ownership structures evolve. In these scenarios, the policy may no longer serve its original purpose.

Instead of holding on to a policy that no longer provides strategic value, a life settlement enables the business or policy owner to extract real, tangible value from it—potentially far exceeding the cash surrender value.

✅ Unlock Immediate, Lump-Sum Liquidity

A life settlement provides a lump-sum cash payment from a licensed institutional buyer in exchange for the policy. This infusion of capital can be used for a variety of purposes:

• Reinvesting in new ventures or business growth

• Funding retirement for the departing partner

• Paying off business debt or other liabilities

• Supporting buyouts or succession plans

• Increasing liquidity for estate planning

For cash-strapped businesses or owners preparing for retirement, this can be a powerful source of funds.

✅ Eliminate Ongoing Premium Expenses

If the business is still paying premiums on a policy that’s no longer essential, those recurring costs can become a financial drain. Through a life settlement, the buyer assumes all future premium payments, immediately relieving the business of that financial obligation and improving cash flow.

✅ Maximize the Value of the Policy

Life settlements often yield three to five times more than a policy’s surrender value—especially for policies insuring individuals over age 65 or those who have experienced health changes. This little-known fact allows businesses to tap into a hidden asset that might otherwise be undervalued or overlooked.

✅ Strategic Component of Exit or Succession Planning

A life settlement can play a vital role in a comprehensive exit strategy. Instead of allowing an old policy to expire unused, the value can be redirected toward future business goals, wealth transfer strategies, or estate planning objectives. It offers a smart, strategic way to turn a legacy liability into a current asset.

When Should You Consider a Life Settlement?

You or your client should explore a Life Settlement if:

• ✅ The original buy-sell agreement has been fulfilled, dissolved, or is no longer active

• ✅ The insured is over age 65 or has experienced a decline in health

• ✅ Premium payments have become burdensome or no longer make financial sense

• ✅ The business is being restructured, sold, or undergoing ownership transition

• ✅ Capital reallocation is a priority for retirement, growth, or other financial goals

How One Company Missed Out on $10–$15 Million by Letting Life Insurance Policies Lapse

Eventually, the owners decided to sell the company as part of their retirement plans. After the sale, the business no longer needed the coverage. Unaware of the policy’s potential value on the secondary market, they assumed their only option was to let the policies lapse—essentially walking away from them with nothing in return.

What they didn’t realize was that these policies were highly attractive to investors and could have been sold through a life settlement. According to industry experts, if the company had worked with a licensed life settlement broker, those policies could have generated $10 to $15 million in cash—a substantial return compared to receiving nothing.

By not exploring this option, the company unknowingly left millions on the table—funds that could have been used to:

• Support the owners’ retirement

• Reward loyal employees or shareholders

• Reinvest in other ventures

• Strengthen their long-term financial legacy

This real-world example underscores a critical truth: life insurance is an asset, and like any other asset, it can be sold—often for far more than its surrender value. The key is knowing your options before walking away.

Summit Life Settlements: Your Partner in Business Planning

At Summit Life Settlements, we specialize in helping business owners, financial advisors, and estate planners evaluate whether life insurance policies once used in buy-sell agreements still hold value. Our experienced team provides:

• No-obligation policy appraisals

• Access to a competitive institutional marketplace

• Full transparency throughout the transaction process

• Strategic guidance aligned with your goals

Don’t let valuable life insurance policies sit idle. If the buy-sell agreement has served its purpose, a life settlement may be the next smart step.

Conclusion: Protect Your Business and Unlock Hidden Value

A Buy-Sell Agreement isn’t just a legal formality—it’s a critical component of long-term business planning. Think of it as a strategic roadmap that safeguards your business’s future, minimizes disruption during times of transition, and ensures that your hard work continues to pay off even in your absence. Whether it’s triggered by retirement, disability, or the unexpected death of a partner, a well-structured agreement protects all stakeholders and provides clarity when it’s needed most.

Key elements like clearly defined triggering events, ownership valuation methods, and a reliable funding mechanism—often through life insurance—help ensure a smooth transfer of business interests while preserving relationships and maintaining operational continuity.

But what happens when that life insurance policy tied to your buy-sell agreement is no longer needed?

That’s where life settlements come in. Many business owners are unaware that these once-essential policies may hold significant market value, even if they’ve outlived their original purpose. Instead of lapsing or surrendering the policy for minimal value, you might be able to sell it on the secondary market for a lump sum far exceeding its cash surrender value.

At Summit Life Settlements, we specialize in helping business owners unlock this hidden value. Whether your buy-sell agreement has been fulfilled or your business has evolved beyond its original structure, we can guide you through the life settlement process—turning a dormant asset into a powerful financial resource.

Secure your legacy, protect your partners, and make the most of every asset.

Let us help you explore your options and maximize the value of your business planning.

FAQs About Buy-Sell Agreements

1. Who needs a buy-sell agreement?

Any business with two or more owners—whether structured as a partnership, corporation, or LLC—should strongly consider a buy-sell agreement. It serves as a legal roadmap for ownership transition, helping prevent internal disputes and ensuring continuity when a co-owner retires, becomes disabled, leaves the business, or passes away. Even family-run businesses benefit, especially in succession scenarios.

2. Is a buy-sell agreement legally enforceable?

Yes, a properly drafted and executed buy-sell agreement is a legally binding contract. To ensure enforceability, it should be:

• Written and reviewed by a qualified attorney

• Signed by all parties

• Regularly updated to reflect changes in ownership or business structure

Courts typically uphold these agreements as long as they’re clear, fair, and in compliance with applicable laws.

3. How is a buyout typically funded?

The most common funding method is life insurance, particularly for buyouts triggered by the death of an owner. Other funding sources may include:

• Company reserves or retained earnings

• Sinking funds set aside over time

• Installment payments over a set period

• Bank loans or third-party financing

The right funding mechanism depends on the business’s financial capacity and the type of buy-sell agreement in place.

4. Can a buy-sell agreement be changed or updated?

Absolutely—and it should be. A buy-sell agreement is not static. It should be reviewed regularly (at least every 2–3 years) and updated whenever there’s a:

• Change in ownership or partner roles

• Significant shift in company valuation

• Change in funding method (e.g., new insurance policy)

• Legal or tax regulation updates

Failing to keep the agreement current can make it outdated or unenforceable when it’s needed most.

5. What happens if there’s no buy-sell agreement in place?

Without a buy-sell agreement, a business may face:

• Legal disputes between surviving owners and the deceased owner’s heirs

• Unwanted ownership by inactive or unqualified parties

• Loss of control, potentially harming operations or decision-making

• Costly court proceedings to resolve disagreements

• Valuation uncertainty, delaying or complicating the transfer

In short, not having a buy-sell agreement can jeopardize the entire business.

6. What’s the difference between a cross-purchase and an entity-purchase agreement?

• A cross-purchase agreement allows individual owners to buy the departing owner’s share, usually funded with life insurance policies they own on each other. This works best in businesses with fewer owners.

• An entity-purchase agreement (also called a redemption agreement) allows the business itself to buy back the departing owner’s interest. The company owns and pays for the life insurance policies.

The choice depends on business structure, tax considerations, and how ownership should be distributed after a partner exits.

7. Can life insurance policies used for buy-sell agreements be sold?

Yes. If the business or remaining owners no longer need the policy—such as after a restructuring or retirement—it may be possible to sell the policy through a life settlement. This involves selling the policy to a licensed buyer for a lump-sum cash payment, often higher than the surrender value.

This strategy can help recover value from unused policies and redirect funds into other business or planning needs. Summit Life Settlements specializes in helping businesses evaluate and sell these policies to unlock their full market value.

8. When should a buy-sell agreement be created?
Ideally, a buy-sell agreement should be established when the business is formed or as early as possible in the partnership. Waiting until a triggering event occurs can lead to conflict, delays, and unclear expectations.

9. Who should help draft a buy-sell agreement?
It’s important to involve both legal and financial professionals. An attorney ensures the agreement is enforceable and tailored to your business, while a financial advisor helps structure funding and tax implications.

10. What role do valuation clauses play?
Valuation clauses establish how a business’s worth is calculated during a buyout event. This prevents disputes and ensures a fair, agreed-upon price for all parties.

11. Can a buy-sell agreement address disability or divorce?
Yes. A well-written agreement can cover a wide range of triggering events beyond death, including disability, divorce, bankruptcy, or voluntary exit of a partner.

12. What happens if an owner refuses to sell or cooperate?
If the agreement is legally binding and clearly defines the process, it can compel the sale under specified conditions. Legal recourse may be required if a partner refuses to comply.

13. Are buy-sell agreements only for corporations?
No. Buy-sell agreements can be used by partnerships, LLCs, and closely held corporations. Any multi-owner business structure can benefit from one.

14. How often should a buy-sell agreement be reviewed?
At least every 2–3 years or whenever there is a major change in ownership, business value, tax law, or life circumstances of an owner.

15. How does a buy-sell agreement protect heirs of a deceased owner?
It ensures heirs are fairly compensated without forcing them into business operations they may not want or be qualified to manage. It also prevents unwanted outsiders from acquiring ownership stakes.