Two partners signed a smart agreement in 2012, then never looked at it again. Here's how a document meant to protect both families could end up hurting one of them.
Ray and Denise each own half of a commercial HVAC company in the Inland Empire. In 2012, when the business was worth about $1 million, their attorney drafted a buy-sell agreement. It said the company would buy back a deceased owner's shares for a fixed price of $500,000, funded by a $500,000 life insurance policy the company owned on each of them.
Fourteen years later, the company has grown to roughly $4 million in value. Nobody has touched the agreement.
This business and these people are hypothetical. Figures are rounded and simplified for illustration.
If Ray died today, the agreement could let the company buy his half, worth around $2 million, for $500,000. Ray's family would receive a fraction of what his share was worth. If the agreement were ignored instead, the partners' families might end up in a dispute.
Even at a fair price, $500,000 of insurance wouldn't cover a $2 million buyout. The company would need to borrow or pay over time, at the worst possible moment.
The agreement only addresses death. If Denise had a stroke and couldn't work, there'd be no agreed way, price or money to buy her out, while she still owned half the company.
In June 2024, the Supreme Court decided a case involving two brothers with an agreement much like Ray and Denise's: the company owned life insurance and had to use it to redeem a deceased brother's shares.1
The Court held that the insurance proceeds counted toward the company's value for federal estate tax, and the company's obligation to buy back the shares did not offset that value.1 The result was a higher estate tax value for the deceased owner's shares.
For most owners this matters only if their estate could be large enough for estate tax. (Check yours with the Estate Tax Exposure Check.) But it's a reason to look at who owns the policies and how the agreement is structured, for example a cross-purchase between owners or other arrangements your attorney may suggest.
For the bigger picture of leaving a business, see Leaving Your Business: An Exit Planning Guide, or score yourself with the Business Readiness Snapshot.
A review conversation can check whether the price, the funding and the triggers still match your business today, and what to raise with your attorney and CPA.
Book a time with Kevin Hypothetical example. Kevin is not an attorney or CPA. Buy-sell agreements should be drafted and reviewed with licensed professionals.