What is a buy-sell agreement, and how do you fund one?
A buy-sell agreement is a contract between owners that says who buys a departing owner's share, at what price or by what formula, and on what terms. Your attorney drafts it. Funding is the separate question of where the money comes from, and life insurance is the usual answer because it produces cash at exactly the moment a business has least of it. An agreement without funding is a set of instructions with no fuel in the tank.
The agreement and the funding are two different things
This is the distinction that matters most, and it is the one that gets blurred in conversation. The agreement is a legal document that decides what happens. The funding is where the money comes from. They fail separately and they need different people.
I meet owners with a beautifully drafted agreement and nothing behind it. Everyone knows exactly what should happen and nobody can pay for it. That is a plan in the same way a recipe is a dinner.
Three structures
| Structure | How it works | Where it fits |
|---|---|---|
| Cross-purchase | Each owner holds a policy on the other and buys the departing share directly. | Two or three owners. Gets unwieldy fast as the number grows, because everyone needs a policy on everyone. |
| Entity redemption | The company owns the policies and buys the share back, retiring it. | More owners, or where one policy per person is simpler to administer. |
| Hybrid | The company gets first option. If it declines, the remaining owners can buy. | Where you want flexibility to decide at the time rather than in advance. |
The choice has real tax and basis consequences and it is not a coin toss. Your CPA and the attorney drafting the agreement should decide it together. Our job starts once that is settled.
The valuation is where plans quietly rot
An agreement is only as current as the number in it. Owners sign one, feel relieved, and put it in a drawer. Nine years later the business has tripled and the agreement still names a price from a different era.
That is worse than no agreement in one specific way: it is enforceable. A family can be held to a price that was fair once and is now a fraction of what the share is worth.
Fix it by writing the review into the agreement itself. Every two years, or on a formula that moves with the numbers rather than a figure that does not.
A worked example
Three partners in a regional distribution business, roughly equal shares, company valued around $3 million. They set up cross-purchase, so each partner holds a policy on the other two. Six policies in total.
One partner dies. His widow receives $1 million in cash within weeks. The two surviving partners own the business outright, in the proportions they expected, with no new co-owner and no debt taken on to make it happen.
Now the version without funding. Same agreement, no policies. The survivors owe the widow $1 million they do not have. They approach the bank, which has just watched a third of the leadership die, and ask to borrow it. Or they pay her over eight years while she waits and they carry the debt. Everybody is worse off and the document did not prevent any of it.
Where we fit
The agreement is legal work. Impact Solution Services does not provide legal services, and we work alongside the attorney you designate. What we do is the funding: how much is genuinely needed, whose lives are covered, how the policies are owned so the money lands where the agreement says it should, and what that costs each month.
This is general education about how continuation planning works, not legal or tax advice, and not a recommendation about your business.
While we are on the subject.
What does a buy-sell agreement actually do?
It removes the negotiation. It states in advance who buys a departing owner's share, how the price is set, and on what terms, so nobody is bargaining during a death, a divorce, or a falling out. Your attorney drafts it.
What are the main structures?
Cross-purchase, where the owners buy each other's shares directly. Entity redemption, where the company buys the share back. And hybrid, where the company has the first option and the owners take it up if it declines. Each has different tax and ownership consequences, which is a conversation for your CPA and attorney.
Why fund it with life insurance?
Because it produces a large amount of cash at precisely the moment the business is least able to produce it itself. The alternatives are paying from cash reserves, borrowing from a bank that has just become nervous, or paying the family in instalments over years.
How often should the valuation be updated?
Every two to three years at minimum, and after anything significant. An agreement fixing a price set a decade ago is not protecting anyone. Most owners have not looked since the day they signed.
What happens if there is no agreement at all?
The departing owner's share passes under their will or state law, so a surviving spouse or adult children can become your business partners. They usually want money rather than a business. You usually want control rather than a new partner. Neither of you has the cash.
Bring us the version of this question that is actually yours.
The first conversation is free, and it stays in plain English.
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