The short answer: A buy-sell agreement is a contract between the owners of a business that says what happens to an owner's share if they die, become disabled, retire, divorce or simply want out. It sets who may buy the share, how the price is figured and where the money comes from, often life insurance. Without one, a New York or New Jersey business can end up with a grieving spouse, an estate or even a stranger as your new co-owner.
Most business owners spend years building something valuable and almost no time deciding what happens to it when one partner is suddenly gone. A buy-sell agreement is the piece of a business succession plan that answers that question before it becomes a crisis.
What is a buy-sell agreement?
A buy-sell agreement (sometimes called a buyout agreement) is a binding contract among the owners of a company. It can be its own document or a section of an LLC operating agreement, a corporate shareholders' agreement or a partnership agreement.
A well-drafted agreement usually covers four things:
Triggering events. The situations that start a buyout, such as death, long-term disability, retirement, divorce, bankruptcy, termination of employment or an owner who wants to leave.
Who buys. The company, the remaining owners, or a mix.
Price. How the share will be valued.
Funding. How the buyer will actually pay.
What happens to my share of the business if I die without one?
Your ownership interest is an asset of your estate, so it passes under your will, your trust or, if you have neither, the intestacy rules. That's where it gets messy.
In New York, the LLC Law lets a deceased member's executor or administrator exercise the member's rights for the purpose of settling the estate (N.Y. LLC Law § 608). Unless the operating agreement says otherwise, someone who inherits an LLC interest generally receives the economic rights, such as distributions, but doesn't automatically become a voting member. New Jersey's Revised Uniform Limited Liability Company Act (N.J.S.A. 42:2C) has its own default rules on what happens when a member dies.
In practice, that can leave:
Your family holding an interest they can't sell easily and can't control
Your partners sharing profits with heirs who don't work in the business
Everyone arguing over what the share is worth, sometimes in court
We've written about how quickly things can fall apart in business breakups that can be worse than divorces. A buy-sell agreement is how you keep a death or departure from turning into one.
What are the main types of buy-sell agreements?
Cross-purchase agreement
Each owner agrees to buy a departing owner's share directly. If life insurance funds it, each owner typically owns a policy on the others. This can work well with two or three owners, but the number of policies grows quickly as more owners are added.
Entity redemption (stock redemption) agreement
The company itself buys back the share. It's simpler to administer because the business owns one policy per owner. There are tax trade-offs, though, and a 2024 U.S. Supreme Court decision made the structure worth a second look (more on that below).
Hybrid ("wait-and-see") agreement
The company and the remaining owners each get options, and the final structure is decided when the triggering event happens. This keeps flexibility but takes careful drafting.
How is the price set in a buy-sell agreement?
Valuation is where many agreements fail. Common methods include:
Fixed price. The owners agree on a number and are supposed to update it every year. Many never do, so the price gets stale.
Formula. For example, a multiple of earnings or book value. Simple, but it may not track real market value.
Independent appraisal. A qualified appraiser values the business at the time of the event. Usually the most accurate, though it adds cost and time.
Whatever you choose, the agreement should spell out the valuation date, who picks the appraiser and how disputes get resolved.
How do you fund a buy-sell agreement?
A promise to buy is only as good as the money behind it. Common funding sources include:
Life insurance on each owner, which pays out right when the money is needed most
Disability buyout insurance for a long-term disability trigger
Installment payments from the buyer over several years
Company cash reserves or a sinking fund
Insurance planning often overlaps with estate tax planning. Our post on why the irrevocable life insurance trust is not dead explains one way owners keep policy proceeds out of their taxable estate.
Does the Connelly case change how buy-sell agreements should be set up?
It may. In Connelly v. United States, 602 U.S. 257 (2024), the Supreme Court held that when a corporation receives life insurance proceeds to redeem a deceased owner's shares, those proceeds count toward the company's value for federal estate tax purposes, and the obligation to redeem the shares doesn't reduce that value. For some families, that can mean a higher estate tax value than expected.
The decision doesn't make entity redemption agreements wrong, but it's a good reason to have an existing agreement reviewed, especially if it was signed years ago and relies on company-owned life insurance.
When should you review your buy-sell agreement?
Review it whenever something big changes: a new owner joins, the business grows quickly, an owner marries, divorces or has a child, tax law changes, or the agreed price hasn't been updated in a year or more. Fast growth in particular can leave an old agreement badly out of date, a risk we cover in how fast growth can put your business at legal risk.
Your buy-sell agreement should also line up with your personal estate plan. If your share is meant to pass into a revocable living trust, or the buyout money is meant to support your spouse and children, your will, trust and beneficiary designations need to say the same thing your business documents do.
Frequently asked questions
Do I need a buy-sell agreement if I own a single-member LLC?
There's no co-owner to buy you out, but you still need a plan for who runs or sells the business if you die or become incapacitated. That's usually handled through the operating agreement, your estate plan and, sometimes, an agreement with a key employee or another business willing to buy.
Is a buy-sell agreement the same as an operating agreement?
No, although buy-sell terms are often written into an LLC operating agreement or a shareholders' agreement. What matters is that the terms exist and are binding on every owner.
How much does a buy-sell agreement cost?
It depends on the number of owners, the structure, the valuation method and whether insurance and estate planning are coordinated at the same time. A consultation is the best way to get a clear quote for your business.
Can a buy-sell agreement be changed later?
Yes. Owners can amend it, usually with the consent the agreement itself requires. Many owners schedule a yearly review to update the price and check the funding.
Protect the business you built
A buy-sell agreement gives your partners certainty, gives your family a fair price, and keeps the business running when something unexpected happens. Adelman Bodner Law Firm helps New York and New Jersey business owners coordinate buy-sell terms with their wills, trusts and overall succession plans.
Book a consultation or call (877) 728-6256.
Attorney Advertising. Prior results do not guarantee a similar outcome. This post is general information, not legal advice.