Buy Sell Agreements

Contents

1. What the contract does
2. The events that set it off
3. Who the buyer is
4. Setting the number
5. Where the money comes from
6. The farm version
7. Drafting details that matter later
8. When the buyer is the management team

Brent O’Mara works with business owners and multigenerational families, and business succession, one of the places that work often reaches, tends to begin with a document before any decision is made. The document is a signed contract, usually a few pages long, that answers three questions before anyone has to ask them: who may buy an owner’s share of the company, at what price, and with what money. University of Wisconsin Extension defines it as a document that allows, and in some cases requires, the seller to sell and the buyer to buy the assets it names, on a set of procedures for fixing the price, paying it and timing the process.³

What the contract does

Inc. describes buy sell agreements as legally binding contracts that reallocate portions of a business when an owner dies, falls ill or wants to sell a share, and notes that they formalize the company’s sale price, the value of each owner’s stake and the ground rules on who can and cannot be a buyer.⁵ The same source adds the quieter purpose: the agreement lowers the chance of a fight among family members or partners who might otherwise put their own interests ahead of the company’s.⁵ It belongs inside the wider work of business succession planning, but it is the piece most likely to be read in a hurry.

The events that set it off

The agreement does nothing until a trigger named in it occurs. The Wisconsin program lists death, disability, termination of employment, retirement and sometimes divorce.³ A Kiplinger column by a planner who works with private company owners groups the forced exits under four headings, divorce, disagreement, disability and death, and observes that buy sell agreements establish the terms on which owners leave when one of those triggers arrives.⁴ Its figures explain why disability sits on the list at all: the Social Security Administration estimates that one in four of today’s twenty year olds will become disabled before retirement age, and a company that must be sold because its owner cannot work tends to sell for less.⁴

Who the buyer is

Two shapes cover most agreements. In a cross purchase the other owners are the buyers; in a redemption the company itself buys the departing owner’s interest; some agreements alternate between the two. The terms often live inside the entity’s own documents, the corporate bylaws, the operating agreement of a limited liability company or the partnership agreement, though they can also stand alone as contracts between an owner and an employee.³ Inc.’s estate planning guide describes the ordinary sequence when a partner dies: the remaining partners hold a right of first refusal on the shares, and only afterward can the shares be offered to outsiders, often the family of the person who died.⁶

Figure

Right of first refusal against the buy sell agreement

	Right of first refusal	Buy sell agreement
What it does	Lets the holder match an outside offer before the asset is sold to anyone else	Allows, and sometimes requires, the seller to sell and the buyer to buy the assets it names
What starts it	A legitimate third party offer that the owner chooses to accept	Events written into the document, such as death, disability, retirement or divorce
Price	Whatever the outside bidder offered, with no price protection for the holder	A set price, a formula or an appraisal procedure written in advance
Weakness	The property may never come up for sale in the holder's lifetime	Funding the purchase can still be hard if the money was never arranged

Setting the number

Price is the clause families argue over. The Wisconsin program lists five ways to set it: an appraisal, sometimes one commissioned by each side with a third averaged in; the price an outside bidder actually offered; a formula, often fair market value less a discount because a closely held interest is hard to sell and may be a minority stake; a value the owners agree on at the start of each year; or a figure built from the enterprise’s profitability and cash flow.³ Nebraska Extension calls the purchase price one of the biggest struggles families face with the tool, since the assets will be valued at a death that may be decades away, and it reports that a future appraised value or the tax assessed value is often written in instead of a fixed sum.¹ The Inc. guide makes the estate side explicit: the valuation attached to the agreement determines what the heirs are owed.⁶ The methods appraisers use are the subject of how a business is valued.

Where the money comes from

An agreement without funding is a promise without a wallet. A USA Today column notes that partners often carry life insurance on one another to pay for the purchase.⁷ The Inc. guide describes the mechanics: when the policy pays out on a deceased owner, the remaining partners use the proceeds to pay that owner’s estate for the shares.⁶ Wisconsin adds the caveat that insurance covers only a death trigger, so payment terms, usually installments to the seller, have to be written for retirement, disability and the rest, and for the case where a policy has lapsed or no longer covers the price.³

Figure

Five ways the agreement can set the price

1. 01
   AppraisalOne appraiser, or one hired by each side with a third averaged in
2. 02
   Matched bidThe price an outside buyer actually offered, as in a right of first refusal
3. 03
   FormulaFair market value less an agreed discount for a closely held interest
4. 04
   Annual valueOwners agree a number at the start of each year and use it if a trigger arrives
5. 05
   EarningsA value based on the enterprise's profitability and cash flow

The farm version

On a Nebraska farm the agreement usually runs between a parent and the child who stayed. Nebraska Extension’s worked example has the child sign such an agreement with the parent to purchase, at the parent’s death and for a stated price, any farm asset the child does not inherit, and then buy a life insurance policy on the parent, as its owner and beneficiary, to fund the purchase from siblings who left.¹ A second Nebraska article explains what the document can fix when farmland is shared by on farm and off farm heirs: who has the right to buy ground that is integral to the operation, a first right of refusal for the farming child if a sibling ever sells, and a price based on the land’s earning capacity rather than the top of the land market.² University of Minnesota Extension describes parents writing such agreements with farming heirs, committing to exact sale prices, terms and timing, and notes that they bind the off farm heirs as well.⁸ The wider setting is covered under family business in Nebraska.

Drafting details that matter later

Nebraska Extension’s checklist is short and practical. The agreement should say who has the right to purchase, which assets are included, any conditions of the sale, when the sale can be made and how the price is determined; it should be dated, signed, notarized and kept with the other estate documents.¹ The same article warns that term life policies often expire before they are needed, that an owner of advanced age may be uninsurable or the premium unaffordable, and that the ownership of the policy became a question with estate consequences, if the arrangement is structured badly, after a Supreme Court case decided in 2024, Connelly v. United States.¹ Minnesota’s guide adds that a death benefit on a policy the insured owns is counted in that person’s estate regardless of the beneficiary.⁸

When the buyer is the management team

The agreement sets the rules; it does not choose the successor. Where the eventual buyers are the people already running the company, the purchase usually takes the form described under management buyouts, often with the seller carrying part of the price over several years. Where more than two owners are involved, Nebraska Extension cautions that insurance funded agreements get considerably more complex.¹

The limit of the document is that it fixes the terms of an exit and nothing else. It cannot make a child want the business, keep a policy in force, or stop a disagreement between the partners who signed it; and a price formula drafted in a strong year can look wrong in a weak one. The terms are tax and legal work; the right ones depend on each family’s circumstances and are a task for qualified professionals, whether their field is tax, law or finance.