Why Should Business Owners Review Their Buy-Sell Agreement?
Last reviewed: July 2026
Business owners should review their buy-sell agreement because most of these documents stop matching the business within a few years of signing, and a stale buy-sell fails at the exact moment a family needs it. The agreement still reads fine on paper, but the business it describes no longer exists, or there is no money behind the promise it makes. A buy-sell agreement is only as good as its last honest review, and far too many owners have never had one.
Key Takeaways
- A buy-sell agreement controls what happens to an ownership stake when an owner dies, becomes disabled, divorces, retires, or exits.
- The most common failure is not a bad agreement; it is one with no funding behind the buyout obligation it creates.
- Maryland's estate tax exemption is $5 million per person, far below the federal $15 million exemption, so a business interest can trigger state estate tax.
- Review the agreement, its valuation, and its funding every three years, or any time the business changes in value.
About the Author: Jeff Judge, CFP®, AEP®, ChFC®, CLU® is Managing Partner of Chesapeake Financial Planners in Forest Hill, Maryland. He has been helping families and business owners in Harford County and the Baltimore metro area navigate buy-sell agreements and business succession since earning his CFP® certification in 2013, using Chesapeake's signature process, the R.U.D.D.E.R. Method™. "I have read buy-sell agreements that were technically valid and completely useless," Jeff says. "The signatures were real. The business they described had been gone for a decade."
What Does a Buy-Sell Agreement Actually Do for Business Owners?
A buy-sell agreement is a legally binding contract among business co-owners that sets what happens to an ownership interest when a triggering event occurs: death, permanent disability, voluntary departure, divorce, bankruptcy, or retirement. It names who may buy the departing owner's interest, how the price is set, and on what terms. For the full primer, see our guide on what a buy-sell agreement is and why partners need one.
Done well, it settles the hard questions while everyone is calm. Surviving owners get a clear path to keep running the company, and a departing owner or that owner's family gets a committed buyer and an agreed method for fair value. Without one, an owner's death can leave family members as unwanted co-owners or trigger a years-long standoff between surviving partners and the estate.
Does a single-owner business need a buy-sell agreement? A sole owner has no co-owner to buy from or sell to, so a traditional buy-sell does not apply the same way. That owner still needs a documented succession framework, because the estate inherits the business and the same valuation and funding questions surface anyway. The U.S. Small Business Administration's guidance on transferring a business makes the point: any partnership change requires the co-owners to agree, in writing.
Why Do So Many Buy-Sell Agreements Have No Funding Behind Them?
The most common failure I find is not the language of the agreement. It is the absence of money to back it. An agreement that obligates a surviving partner to buy a deceased partner's interest for several million dollars does nothing if the survivor lacks the cash and the business cannot generate it fast. The legal obligation is real; the money is not there. What follows is predictable: a forced negotiation with a grieving family, a payout that strains cash flow for years, or a fire sale of assets.
Life insurance is the most common and most efficient way to fund a buy-sell. Each owner is insured for an amount that roughly tracks the value of their stake, and the proceeds supply the cash to complete the buyout without borrowing or selling. But the details matter: who owns the policy, who pays the premium, and who is named beneficiary all change how proceeds are taxed and whether the buyout works. Life insurance death benefits are generally income tax-free, though the treatment depends on ownership structure, so involve a qualified tax professional rather than guess. The trap I watch for most is an agreement drafted as a cross-purchase while the policies sit under the corporation. The proceeds land in the wrong entity, the tax treatment falls apart, and nobody catches it until the day it has to work.
Cross-Purchase, Entity-Purchase, or Wait-and-See: Which Structure Fits?
The structure decides who buys the departing owner's interest and how the tax math lands. The three common approaches are cross-purchase, entity-purchase (sometimes called a stock redemption), and a wait-and-see hybrid.
| Feature | Cross-Purchase | Entity-Purchase (Redemption) | Wait-and-See Hybrid |
|---|---|---|---|
| Who buys the interest | Each remaining owner buys directly | The business entity buys it back | Decided at the triggering event |
| Cost basis step-up for buyers | Yes, buyers get a stepped-up basis | No step-up for surviving owners | Depends on who ultimately buys |
| Life insurance policies needed | One per owner pair (grows fast) | One per owner, owned by the entity | Flexible, set later |
| Best fit | Two owners | Three or more owners | Owners who want to defer the choice |
In a cross-purchase, each co-owner owns a policy on every other owner and uses the death benefit to buy the deceased owner's shares. The advantage is a stepped-up cost basis, which lowers capital gains exposure at a future sale. In an entity-purchase, the business owns the policies and redeems the shares; it is simpler with several owners, but surviving owners get no basis step-up. A wait-and-see hybrid defers the decision to the triggering event itself.
So which one should you pick? For two owners, a cross-purchase is often more tax-efficient because of the basis step-up. For three or more owners, the policy count a cross-purchase requires gets unwieldy fast, which pushes many groups toward an entity-purchase. The right answer depends on your ownership count, entity type, and each owner's tax position.
How Should Business Owners Keep a Buy-Sell Agreement Current?
Business owners keep a buy-sell agreement current by reviewing the valuation, the funding, and the disability terms at least every three years, and any time the business changes materially. Even a funded agreement fails if the buyout figure has no relationship to what the company is worth today.
Values move. An agreement signed when a company had $2 million in revenue and now does $8 million may carry a fixed price or formula that badly undervalues what a departing owner's estate is owed. The family expects $6 million based on what the business became; the agreement says $1.8 million based on a number set eight years ago. There are three ways to set value: a fixed price updated periodically, which almost never happens; a formula tied to revenue or earnings; and a formal appraisal at the triggering event, which is accurate but slower. Jeff pushes owners to build a review clause into the agreement, because that review never happens on its own, and a policy that covered the buyout five years ago may now cover half of what it needs to.
Disability is the trigger most agreements handle worst. A permanent disability can hit a business as hard as a death: the owner needs income and a way out, and the remaining owners need to run the company without a non-working partner still drawing distributions. Disability buyout insurance exists for this and is badly underused; it costs more than life insurance, and the definitions of what triggers it carry real weight. Insurance products contain exclusions and limitations, so the policy and the agreement have to line up. Keeping all of this aligned is the core of the R.U.D.D.E.R. Method™, Chesapeake Financial Planners' six-step planning process: Review and Recognize, Uncover and Understand, Design and Develop, Discuss and Decide, Execute and Empower, and Reassess and Refine. A buy-sell sits where the attorney, the financial planner, and the insurance advisor meet, and those three are rarely in the same conversation. Reassess is the step most owners skip.
Why Does a Buy-Sell Agreement Matter More for Maryland Business Owners?
Maryland business owners face a state-level wrinkle owners in many other states do not, and a buy-sell agreement is where it surfaces. Maryland levies its own estate tax with an exemption of $5 million per person, far below the federal exemption of $15 million per person, $30 million per couple, which the One Big Beautiful Bill Act made permanent effective January 1, 2026. A closely held business interest can push a Maryland owner's estate over the state threshold even when the owner is well under the federal exemption.
That gap is not theoretical for the owners we work with around Forest Hill and across Harford County. A company in the $5 million to $10 million range can carry no federal estate tax exposure and still face Maryland estate tax, where the top rate reaches 16%. That is why valuation accuracy carries extra weight for a Maryland owner, and why the buy-sell ties directly into broader business owner estate planning. Owners in Bel Air often built companies worth far more than they expected at signing, and coordination with a Maryland attorney keeps the documents in step with the business.
Frequently Asked Questions
What is a buy-sell agreement in plain terms?
A buy-sell agreement is a written contract among business co-owners that decides what happens to an owner's share when that owner dies, becomes disabled, divorces, retires, or leaves. It sets the buyout price, names who can buy, and spells out how the purchase is funded.
How often should business owners review a buy-sell agreement?
Business owners should review a buy-sell agreement at least every three years, and any time the business changes materially in value, ownership, or structure. Most buy-sell problems come from agreements written once and never touched again. Each review should include a current valuation and a funding check.
What happens if a buy-sell agreement is not funded?
If a buy-sell agreement is not funded, the surviving owner may hold a legal obligation to buy a departing owner's interest with no cash to do it. The result is usually a forced negotiation with the grieving family, a multi-year payout, or a distressed sale. Funding, most often life insurance, makes it workable.
What is the difference between cross-purchase and entity-purchase?
In a cross-purchase, the remaining individual owners buy the departing owner's interest directly and receive a stepped-up cost basis. In an entity-purchase, the business itself buys back the interest, which simplifies the insurance but gives surviving owners no basis step-up. Cross-purchase often suits two owners; entity-purchase suits three or more.
Does Maryland estate tax affect business owners differently than federal tax?
Yes. Maryland's estate tax exemption is $5 million per person, well below the federal $15 million exemption, so a Maryland business owner can owe state estate tax even with no federal liability. A business interest counted in the estate can push the total over Maryland's threshold, where the top rate reaches 16%.
Should a buy-sell agreement cover disability, not just death?
Yes. A permanent disability can disrupt a business as much as a death, yet many agreements omit it or use vague language that invites a dispute. A strong buy-sell defines what disability triggers a buyout, how long it must last, and what happens to distributions in the interim. Disability buyout insurance can fund it.
Ready to Find the Gaps Before They Become a Crisis?
If you have a buy-sell agreement and have not reviewed it in the last few years, that is the place to start. The people who would bear the consequences are not you; they are the ones who depend on you. Jeff Judge and the Chesapeake Financial Planners team serve business owners across Harford County and the Baltimore metro from our Forest Hill office. Schedule a free fit call at chesapeakefp.com for a clear look at where your buy-sell agreement for business owners actually stands.
A version of this article was originally published on Chesapeake Financial Planners' LinkedIn.
Disclosures
The information provided is for educational purposes only and should not be construed as investment advice. Investment strategies should be tailored to individual circumstances, risk tolerance, and goals. Past performance doesn't guarantee future results. Consult with qualified financial professionals regarding your specific situation.
This material is for educational purposes only. Insurance products contain exclusions, limitations, and terms for keeping them in force. Please contact a qualified insurance professional for costs and complete details.
This information is not intended to be a substitute for specific individualized tax, investment or legal advice. We suggest that you discuss your specific situation with a qualified tax, legal or financial advisor.
Advisors associated with Chesapeake Financial Planners may be either (1) LPL Financial Registered Representatives offering securities through LPL Financial, Member FINRA and SIPC, and investment advisor representatives offering investment advice through Great Valley Advisor Group; or (2) solely investment advisor representatives offering investment advice through Great Valley Advisor Group and not affiliated with LPL Financial. Great Valley Advisor Group, and Chesapeake Financial Planners are separate entities from LPL Financial.
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