If Your Partner Died Tomorrow, Who Would Own Your Company? 6 Rules for a Buy-Sell Agreement

Michael and Thomas Connelly did almost everything right. The two brothers owned Crown C Supply, a roofing and siding business in St. Louis, and they signed an agreement to keep it in the family: if one of them died, the survivor could buy his shares, and if he declined, the company itself would redeem them. To make sure the cash would be there, Crown bought a $3.5 million life insurance policy on each brother.

When Michael died in 2013, the plan worked. Thomas declined to buy, Crown used $3 million of the insurance to redeem Michael's shares, and the business stayed in the family. Then the IRS arrived. It argued that the insurance proceeds belonged in the company's value, which put Crown at $6.86 million and Michael's roughly 77% stake at about $5.3 million, not $3 million. The estate owed close to $900,000 in extra tax. In June 2024, a unanimous U.S. Supreme Court sided with the IRS in Connelly v. United States. A buy-sell agreement that looked finished on paper cost the family nearly a million dollars because of how it was structured and how rarely it was revisited.

Every company with more than one owner will one day face a death, a divorce, a disability or a partner who simply wants out. The only question is whether the rules for that day were written calmly in advance or improvised in a lawyer's office afterwards. Our family has owned businesses since 1890, and the lesson I keep returning to is simple: the ownership plan matters as much as the business plan. Here are the six rules I would put in front of any group of co-owners.

What a buy-sell agreement actually does

A buy-sell agreement is a binding contract between the owners of a private company that decides three things before anyone needs them: when an owner's shares must or may be sold, who buys them, and at what price and on what terms.

Without one, the default rules take over. Shares pass under a will or by law to heirs who may have no interest in the business. A divorce settlement can hand half a stake to an ex-spouse. A partner who leaves can keep his shares, and his vote, for decades.

A buy-sell agreement is a prenuptial agreement for business partners: it is cheap and friendly to sign while everyone gets along, and nearly impossible to negotiate once they do not. It sits alongside the broader governance work I described in the family constitution that keeps a business in the family.

Rule 1: Name every trigger, not just death

Most agreements are written with death in mind because that is what insurance agents sell. In practice, death is only one of the events that force an ownership change. Advisors often call them the five Ds:

• Death of an owner.
• Disability that keeps an owner from working for a defined period.
• Divorce, where a court could award shares to a spouse.
• Departure, whether retirement, resignation or dismissal.
• Disagreement that turns into deadlock.

Add two more for a family company: default (personal bankruptcy or a creditor seizing shares) and disqualification (an owner who breaks a non-compete or a conduct rule).

For each trigger, the agreement must say whether the sale is mandatory or optional, and who has the right to force it. A retiring founder should usually be able to require a purchase; a divorcing spouse should never be able to keep the shares.

Rule 2: Decide who buys, and structure it with Connelly in mind

There are three classic structures:

• Entity redemption (stock redemption): the company buys the shares. Simple, one insurance policy per owner, but after Connelly, company-owned insurance can inflate the value of the deceased owner's shares for estate tax purposes.
• Cross-purchase: the surviving owners buy the shares personally, each owning policies on the others. The survivors get a higher tax basis and the proceeds stay outside the company's value, but with many owners the number of policies multiplies quickly.
• Hybrid, or "wait-and-see": the owners get the first option, the company buys whatever they decline. This keeps flexibility until the actual event.

The structure is a tax decision as much as a legal one, which is why your lawyer and your tax advisor must draft it together. If your current agreement is an entity redemption funded by company-owned life insurance and was signed before June 2024, it deserves a review this year.

Rule 3: Fix the price mechanism, not a price

The Connelly agreement contemplated a regular process to agree on the value of the shares. It did not happen, and when the day came, the brother and the estate settled on a number between themselves. That is the most common failure I see: a fixed price written into the agreement at signing and never updated.

A price set ten years ago can be half or double the real value today, and whichever side loses will fight it. Choose one of three mechanisms instead:

• An annual agreed value, signed by all owners each year, with an automatic fallback to appraisal if the certificate is more than 12 to 24 months old.
• A formula, such as a multiple of trailing EBITDA adjusted for net debt, defined line by line.
• An independent appraisal at the time of the trigger, with a named method and a tie-breaker if two appraisers disagree.

Decide also whether minority and marketability discounts apply. A 20% family shareholder bought out at a discounted value will feel cheated; one bought out at full pro rata value may bankrupt the remaining owners.

The price clause should be boring, specific and self-updating, because every ambiguity in it becomes a lawsuit between relatives.

Rule 4: Fund it before you need it

A perfect agreement that nobody can pay for is worthless. When an owner of a 40% stake dies, the survivors rarely have that much cash sitting in the bank.

The usual funding sources, often combined:

• Life and disability insurance, sized to the current valuation and reviewed whenever the valuation moves.
• Installment payments through a promissory note over five to ten years, with interest and security, so the company is not drained in one year.
• A sinking fund or reserve for retirement buyouts, which insurance does not cover.
• Bank financing arranged in principle in advance, not negotiated in the middle of a crisis.

Match each trigger to a funding source: insurance covers death, and sometimes disability, but retirement and departures must be paid from cash flow, so the payment terms have to be something the business can actually survive. This is the same logic I applied in the six tests for key person risk: the day an owner disappears is the worst possible day to discover the gap.

Rule 5: Keep shares from walking out of the family one relative at a time

Gucci is the classic warning. Over the late 1980s, members of the Gucci family sold their stakes to the investment firm Investcorp, and in 1993 Maurizio Gucci sold his remaining half. Within a few years of the family feud reaching its peak, no Gucci owned any part of Gucci. Each individual sale was legal. Together they ended a family business that had lasted three generations.

A buy-sell agreement is the tool that controls this. It should include:

• Transfer restrictions: no shares sold, pledged or gifted without the consent of the other owners.
• A right of first refusal for the family and then the company, at the same price and terms as any outside offer.
• Permitted transferees: transfers to descendants or family trusts allowed, transfers to in-laws or outsiders not.
• Spousal consent: spouses sign the agreement, so a divorce settlement cannot put shares in an ex-spouse's hands.
• Drag-along and tag-along rights, so a sale of the whole company is not blocked by one holdout and minority owners are not left behind.

Every restriction you add protects the family's control, and every one also reduces an individual owner's freedom, so write them in together while everyone's interests are aligned.

Rule 6: Build a way out of deadlock, then review it every few years

In 1948, brothers Adolf and Rudolf Dassler stopped working together after years of conflict in their shoe company in Herzogenaurach. There was no mechanism to resolve the dispute, so the company split in two: Adolf founded Adidas, Rudolf founded Puma, and the two firms spent decades as rivals across the river from each other.

Two owners with 50% each, or two branches of a family with equal votes, need a deadlock clause before the deadlock. Common options:

• Escalation: a set period of negotiation, then mediation, then an independent director with a casting vote on defined matters.
• Shotgun (buy-sell) clause: one owner names a price, and the other must either buy at that price or sell at it. It forces honest valuations because the person who sets the price does not know which side of it they will end up on.
• Put and call options that let a minority owner exit after a defined period, or let the majority buy them out.

Finally, put a date in the diary. Review the agreement every two to three years and after every major life or business event: a birth, a marriage, a divorce, an acquisition, a new owner or a new tax rule.

Key Takeaways

• A buy-sell agreement decides when shares are sold, who buys and at what price, before anyone needs the answer.
• Cover every trigger: death, disability, divorce, departure, disagreement, default and disqualification.
• After Connelly v. United States (2024), company-owned life insurance can raise estate tax; review entity redemption plans signed before June 2024.
• Never write a fixed price; use an annual agreed value with an appraisal fallback, a defined formula or an independent appraisal.
• Fund each trigger separately: insurance for death, installment notes and reserves for retirement and departures.
• Transfer restrictions, a right of first refusal and spousal consent keep shares inside the family.
• Include a deadlock mechanism and review the whole agreement every two to three years.

Frequently Asked Questions

What are the four types of buy-sell agreements?

The four common types are entity redemption (the company buys the shares), cross-purchase (the other owners buy them personally), hybrid or wait-and-see (owners get the first option and the company buys the rest), and trusteed or insurance-LLC arrangements, where a separate entity holds the policies and handles the purchase. The right choice depends on the number of owners, their ages and the tax position of each.

What are the disadvantages of a buy-sell agreement?

It restricts each owner's freedom to sell or gift shares, it costs money to draft and to fund with insurance, and a poorly maintained one can create a false sense of security. A stale fixed price or the wrong ownership of insurance policies, as the Connelly case showed, can produce a large and unexpected tax bill. These costs are small next to the cost of having no agreement, but they are real.

How often should a buy-sell agreement be updated?

Review it every two to three years and after any major event such as a death, divorce, new owner, acquisition or change in tax law. The valuation inside it should be refreshed every year, either by a signed certificate of agreed value or by an appraisal. Insurance amounts should move with that valuation.

What is the best way to transfer a business to a family member?

There is no single best way, but the most successful transfers combine a gradual transfer of ownership, through gifts, sales to family trusts or installment sales, with a clear buy-sell agreement and a succession plan for management. The buy-sell agreement protects the transfer by making sure shares cannot leave the family and that everyone knows how an exit will be priced. Get tax advice before any transfer, because the method changes the estate and gift tax result considerably.

Before the Next Family Meeting

Pull out your buy-sell agreement, if you have one, and ask three questions: when was the price last updated, who owns the insurance, and what happens if one of us divorces tomorrow? If nobody at the table can answer, the agreement is not finished. To see how we think about building companies that outlast their founders, read more about Manzanos Enterprises.