Buy-Sell Agreements and Business Valuation: Planning for an Owner's Exit

A buy sell agreement is a contract among co-owners that decides in advance what happens to an owner's stake when that owner dies, becomes disabled, divorces, or leaves. It fixes who may buy, what triggers the buyout, and how the price is determined, so the remaining owners are not negotiating with a departing owner's estate or spouse at the worst possible moment.

What does a buy-sell agreement actually do?

It converts an unpredictable event into a pre-agreed transaction. Without one, an owner's interest passes wherever that owner's will, divorce decree, or creditors send it, and the surviving owners may find themselves in business with someone they never chose.

The U.S. Small Business Administration Office of Advocacy's 2025 Small Business Profile for Pennsylvania counts “1.2 million small businesses” in the Commonwealth, or “99.6 percent of Pennsylvania businesses.” Most are closely held, with no public market for their shares — precisely the situation a buy-sell agreement is built for.

It sits alongside the governance documents rather than replacing them. Our post on shareholder agreements covers the wider set of private rules owners write for voting, transfers, and disputes.

Trigger events: death, disability, divorce, and departure

Which events trigger a buyout is a drafting decision, not a legal default. Most agreements address some combination of the following:

• Death, the most common trigger and the one most often funded with life insurance.
• Disability, which needs a definition, a waiting period, and a decision-maker.
• Divorce, to keep a former spouse from acquiring an interest through equitable distribution.
• Voluntary departure or retirement, often priced differently from an involuntary exit.
• Termination for cause, bankruptcy, or an attempted transfer to an outsider.

Each trigger can carry its own price and payment terms. A company that would be strained by an immediate lump-sum payout often uses an installment note for voluntary exits while reserving insurance-funded cash for death.

How is the price set?

The valuation method is where most buy-sell disputes are won or lost. Three approaches are common: a fixed price the owners agree to and update on a schedule, a formula tied to earnings or book value, or an independent appraisal performed when the trigger occurs.

Each has a failure mode. A fixed price goes stale the moment owners stop updating it. A formula can produce an absurd result in an unusual year. An appraisal is the most defensible but the slowest, and it invites a fight over the appraiser. Many agreements combine them.

Because directors and officers owe duties when they approve these arrangements, the process behind a valuation matters as much as the number — see our post on corporate fiduciary duties.

Cross-purchase, redemption, and how life insurance fits

In a cross-purchase, the remaining owners buy the departing owner's interest directly. In a redemption, the company buys it back. The choice affects who holds the insurance policies, the buyers' tax basis, and the company's balance sheet afterward.

Funding a redemption with company-owned life insurance is common, and it carries a consequence the U.S. Supreme Court addressed directly. In Connelly v. United States, 602 U.S. 257, decided June 6, 2024, the Court held unanimously that “a corporation's contractual obligation to redeem shares is not necessarily a liability that reduces a corporation's value for purposes of the federal estate tax.”

Two brothers owned Crown C Supply, which held $3.5 million of life insurance on each of them to fund a redemption. After one died, the company paid his estate $3 million for his shares, and the estate valued the company at $3.86 million by treating the redemption obligation as an offset to the proceeds. The IRS valued it at $6.86 million and assessed an additional $889,914 in estate tax. The Court affirmed.

What Pennsylvania law requires for transfer restrictions to bind

A buy-sell agreement works only if its transfer restrictions bind whoever ends up holding the shares. 15 Pa.C.S. § 1529 provides that such a restriction “may be imposed by the bylaws or by an agreement among any number of security holders or among them and the corporation,” and it authorizes both structures buy-sell agreements rely on: obligating a holder to offer others a prior opportunity to acquire the securities, and obligating the corporation or another person to purchase them.

Subsection (f) contains the trap. A written restriction may be enforced against the holder and any successor or transferee — including an executor, administrator, trustee, or guardian — only if it is “noted conspicuously” on the face or back of the security, or in the equivalent notice for uncertificated shares. Otherwise, the statute says, the restriction “is ineffective except against a person with actual knowledge.” Signing the agreement and never marking the certificates is a common, avoidable mistake.

An owner's interest is also an estate asset, so the agreement should be reviewed against the owners' personal plans. Our estate planning and trust administration team works with the firm's business and corporate law attorneys where the two sides meet.

Frequently Asked Questions

How often should a buy-sell agreement be reviewed?

There is no statutory interval. Agreements are commonly revisited when ownership changes, when the company's value moves materially, when a stated price or formula reaches the age the agreement sets, or when the tax treatment of a funding structure changes. The 2024 Connelly decision is an example of the last category.

Should a buy-sell agreement be funded with life insurance?

Life insurance is a common way to make cash available when an owner dies, but structure matters. Connelly v. United States held that a corporation's obligation to redeem shares does not necessarily offset the value of insurance proceeds for federal estate tax purposes. Whether cross-purchase or redemption fits a company should be reviewed with counsel and a tax adviser.

What is the difference between a cross-purchase and a redemption structure?

In a cross-purchase, the remaining owners individually buy the departing owner's interest and typically hold policies on one another. In a redemption, the company buys the interest back and owns the policies. The two differ in tax basis for the buyers, in administrative complexity as owner count grows, and in how company-held assets are valued.

Does a buy-sell agreement have to be recorded anywhere in Pennsylvania?

There is no public filing requirement for the agreement itself. Under 15 Pa.C.S. § 1529(f), however, a transfer restriction is generally ineffective against a transferee without actual knowledge unless it is noted conspicuously on the share certificate or in the equivalent notice for uncertificated shares, so the marking step should not be skipped.

Talk to a Bingaman Hess attorney

If your company has no buy-sell agreement, or has one that has not been reviewed since it was signed, our business and corporate attorneys can help you assess the triggers, the valuation method, and the funding structure. Reach us through our contact page.

Melissa Krishock, Esquire is an attorney with Bingaman Hess in Wyomissing, PA, serving Berks County and the greater Pennsylvania region.

This article is for informational purposes only and does not constitute legal advice. No one may rely on this information without consulting an attorney. Anyone who attempts to use this information without attorney consultation does so at their own risk. Bingaman Hess is not and shall never be responsible for anyone who uses this information. It is not legal advice.