Buy Sell Agreement Template (2026): Triggers, Valuation and Funding for Co-Owners

When a co-owner dies, becomes disabled, divorces, or quits, state default rules, a court, or a tense negotiation with the owner's family decides what happens to their share of the business. A buy sell agreement template settles those questions while everyone is healthy and friendly: which events force a sale, who buys, at what price, and how it is paid. This guide covers each decision and ends with a copy-paste draft.

Quick Answer

• A buy-sell agreement is a contract among co-owners, usually including the company, that sets the trigger events, the buyer, the price method, and the payment terms.
• Cover six triggers: death, disability, divorce, retirement, departure, and deadlock.
• Set the price as a fixed number, a formula, or an appraisal, and state whether you use fair market value or fair value and whether discounts apply.
• Fund it with life insurance, disability buyout insurance, or a secured installment note, and choose cross-purchase, entity redemption, or a hybrid. After Connelly v. United States (2024), company-owned insurance plans deserve a fresh tax review.

Triggering Events: When the Buyout Starts

A vague "if an owner leaves" clause fails differently for each event, so define every trigger, its buyer, and its timeline.

Trigger	Define this	What goes wrong without it
Death	Mandatory sale, closing date, insurance paid first	Heirs become co-owners; the survivor cannot fund a sale on the spot
Disability	An objective test (for example, unable to perform substantially all duties for [180] days) and who certifies it	Arguments over whether the owner is "really" disabled
Divorce	Right to buy any interest a court awards to a spouse	A former spouse ends up owning part of the company
Retirement	Notice period, buy option or obligation, payout schedule	A retiree keeps a full vote and share of profits without working
Departure	Separate terms for resigning, termination without cause, and termination for cause	A quitting owner keeps shares and votes indefinitely
Deadlock	Mediation, then buy-or-sell, auction, or dissolution	Two 50% owners freeze the business and only a court can break the tie

Match the disability trigger to your insurance. If the agreement forces a buyout after 90 days but the policy starts paying after a 12-month waiting period, the buyer funds nine months of the purchase from cash flow. Also get each owner's spouse to sign a consent: a spouse is not bound by a contract they did not sign, and in many states a court can treat business ownership as marital property.

For a 50/50 deadlock, a "shotgun" clause (one owner names a price, the other must buy or sell at it) is fast but favors whoever has cash, so allow time to arrange financing and require mediation first. If the goal is to close the business instead, see the business partnership dissolution agreement guide. Sales to outsiders are a different restriction, covered in the right of first refusal guide.

Valuation: Fixed Price, Formula, or Appraisal

Fixed price. Owners sign a stated value and update it on a schedule. It is fast and cheap but goes stale: a $1,000,000 value set in 2021 pays an heir with a 50% stake $500,000 when the business is now worth $3,000,000 and half of it is $1,500,000. Require an annual signed update and an appraisal fallback if nobody signs.

Formula. A multiple of average adjusted earnings over the last [3] years updates itself, but only if you define the inputs: accounting method, owner-compensation add-backs, one-time costs, and how debt and cash are treated.

Appraisal. An independent business appraiser values the company as of the trigger date. It is the most accurate method and the slowest. Name the appraiser's qualifications, how to choose (each side picks one, and those two pick a third if their values differ by more than a set percentage), who pays, and the deadline.

Fair market value vs. fair value. Fair market value is the price a willing buyer and willing seller would agree on, neither forced and both informed; appraisers commonly apply minority-interest and marketability discounts to it. "Fair value" appears in many state corporate statutes (dissenters' rights and shareholder-oppression buyouts, for example), and courts in many states apply it without those discounts, though the rules vary. Whichever standard you pick, write down the standard, the valuation date, and whether discounts apply. Leave it blank and the estate will argue for no discounts while the surviving owner argues for them.

Funding the Buyout

An unfunded buy-sell agreement is a promise the survivor may not be able to keep.

• Life insurance covers death. Size the benefit to the current valuation, say who owns each policy and pays the premiums, and require an annual proof-of-coverage statement. Premiums are generally not tax-deductible.
• Disability buyout insurance pays a lump sum or installments if an owner is disabled under the policy's definition. Waiting periods are often a year or more, so match the agreement's disability test and payment schedule to the policy and plan for the gap.
• An installment note covers retirement, departure, divorce, deadlock, and any shortfall over the insurance. Fix the down payment ([__]%), term, interest rate, security (a pledge of the purchased interest), acceleration on default, and prepayment rights. Many states limit a company's redemption payments if they would leave it unable to pay its debts, so build in a payment cap. Ask your CPA about imputed interest if the stated rate is low.

Cross-Purchase vs. Entity Redemption vs. Hybrid

	Cross-purchase	Entity redemption	Hybrid
Buyer	Surviving owners, personally	The company	Company or owners, chosen at the trigger
Insurance	Each owner insures the others	Company insures each owner	Either
Policies (3 owners)	6	3	Varies
Tax basis	Buyers generally get a cost basis in what they buy	Remaining owners generally get none	Depends on who buys
Weak point	Many policies; every owner must pay premiums	Proceeds count in company value (see Connelly below)	More drafting

With n owners, cross-purchase needs n × (n − 1) policies, so five owners need twenty. A separate entity that holds all the policies is one workaround; ask a tax adviser first. A hybrid, often called "wait-and-see," gives the company the first option and the owners a backup option, so the plan can adapt to tax law and cash on hand when the event happens.

Tax and Entity Traps to Check Before Signing

Connelly v. United States (2024). In June 2024 the U.S. Supreme Court unanimously held that life insurance proceeds a company receives to fund redeeming a deceased owner's shares count as a company asset when valuing those shares for federal estate tax, and the company's obligation to redeem does not offset them. In a simplified, hypothetical example, a company worth $2,000,000 receives $1,000,000 in proceeds when a 50% owner dies. The company can be valued at $3,000,000, so the estate's half could be valued at $1,500,000 even if the agreement pays $1,000,000. This matters most if your estate is near the federal exemption or your state taxes smaller estates. Many advisers now review entity-redemption plans, weigh cross-purchase or hybrid structures, and document how the price is set.

Section 101(j). When the company owns a policy on an owner or employee, the death benefit can be partly taxable unless the company gave written notice, obtained written consent before the policy was issued, and reports the coverage to the IRS each year. The exceptions are technical.

Transfer-for-value (Section 101(a)(2)). Selling or moving an existing policy for value, such as when converting a redemption plan to a cross-purchase plan, can make part of the death benefit taxable unless an exception applies. The exceptions cover transfers to the insured, the insured's partner, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, and they do not cleanly fit every co-owner arrangement.

S corporations. An S corporation can have only one class of stock. IRS regulations generally disregard buy-sell agreements for that test unless a principal purpose is to circumvent the rule and the price is significantly above or below fair market value; a price at book value or between book value and fair market value is generally not treated as significantly off-market. Do not give one owner different distribution or liquidation rights, and have a tax adviser review S-corp buy-sell terms.

Buy Sell Agreement Template (Copy This)

Put these terms in your shareholder agreement or LLC operating agreement, or sign them as a standalone contract that says it controls if the documents conflict.

BUY-SELL AGREEMENT

Date: [DATE]
Company: [COMPANY LEGAL NAME], a [STATE] [corporation / LLC] (the "Company")
Owners: [OWNER 1] ([__]%), [OWNER 2] ([__]%), [OWNER 3] ([__]%)

1. TRIGGERING EVENTS
   (a) Death: the estate must sell and the Buyer must buy.
   (b) Disability: unable to perform substantially all duties for [180] consecutive
       days, as certified by [PHYSICIAN / INSURER]. Buyer's [option / obligation].
   (c) Divorce: the Buyer may buy any interest awarded to a spouse or former
       spouse within [60] days after the order.
   (d) Retirement: after [AGE / YEARS], on [180] days' written notice.
   (e) Departure: resignation, termination without cause, or termination for
       cause; price adjustment in 3(e).
   (f) Deadlock: unresolved [60] days after mediation under Section 7.
   (g) Involuntary transfer: bankruptcy, creditor levy, or [loss of license].

2. BUYER. [Company first, then Owners pro rata / Owners pro rata (cross-purchase) /
   Company only]. Election notice within [30] days after the trigger.

3. PRICE
   (a) Method: [fixed price / formula / appraisal].
   (b) Fixed: $[AMOUNT], updated by a certificate signed by all Owners every [12]
       months; if stale, use appraisal.
   (c) Formula: [MULTIPLE] x average [EBITDA / NET INCOME] for the last [3] fiscal
       years, adjusted for [ADD-BACKS].
   (d) Appraisal: independent appraiser with [QUALIFICATIONS]; each side picks one;
       if values differ by over [10]%, they pick a third. [Company / Buyer] pays.
   (e) Standard: [fair market value / fair value] as of [VALUATION DATE], [with /
       without] minority and marketability discounts. Termination for cause: [__]%
       of price. Insurance proceeds [are / are not] counted in Company value.

4. PAYMENT. Insurance proceeds first. Balance: [__]% at closing, the rest by
   promissory note over [__] years at [RATE], secured by the purchased interest,
   with acceleration on default and free prepayment.

5. INSURANCE. [Company / each Owner] owns and pays for [life / disability buyout]
   policies of at least $[AMOUNT] on each Owner. Each Owner consents in writing to
   Company-owned coverage on their life. A departing Owner may buy the policy on
   their own life for [VALUE].

6. CLOSING within [90] days after the price is set; Seller delivers transfer
   documents and a release.

7. DISPUTES. Mediation by [MEDIATOR], then [shotgun buy-sell / sealed-bid auction /
   dissolution / arbitration in CITY, STATE].

8. [S CORPORATION ONLY] Nothing here creates a second class of stock.

9. GENERAL. Governing law: [STATE]. Price and insurance reviewed every [12] months.
   Amendments need all Owners' signatures. This Agreement controls over the
   [OPERATING / SHAREHOLDER] Agreement dated [DATE].

SIGNATURES
[OWNER 1]: ________  Date: [ ]
[OWNER 2]: ________  Date: [ ]
COMPANY, by [OFFICER]: ________  Date: [ ]
SPOUSAL CONSENT ([SPOUSE NAME]): ________  Date: [ ]

Common Mistakes

• A fixed price nobody updates. The number is stale within a few years.
• Vague valuation. No standard, no valuation date, no discount rule.
• Insurance that does not match the agreement. Wrong amount, wrong owner, or a disability waiting period longer than the agreement's trigger.
• Treating entity redemption as settled. Plans written before Connelly deserve a review.
• Skipping spouses. Without a signed consent, a divorce or death can put shares in hands the agreement does not bind.
• No deadlock exit for 50/50 owners. The only exit is a court.
• Signing once and forgetting. Calendar an annual review of price, insurance, and signers.

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FAQ

What is a buy-sell agreement?

A contract among co-owners, usually including the company, that says which events (death, disability, divorce, retirement, departure, deadlock) require or permit a sale of an owner's interest, who buys it, at what price, and how it is paid.

Should we use cross-purchase or entity redemption?

Neither always wins. Cross-purchase keeps insurance proceeds outside the company and can give buyers a cost basis, but it needs more policies as owners are added. Entity redemption is simpler to run, but after Connelly, company-owned insurance can raise the estate-tax value of the deceased owner's shares. A hybrid preserves the choice; ask your tax adviser to model both.

Can the buy-sell terms live inside our operating or shareholder agreement?

Yes. Many companies include them there, and a standalone agreement also works. Either way, make sure the documents do not conflict and state which one controls. The drag-along and tag-along guide covers the related terms for selling the whole company.

How often should we update the price and the insurance?

At least once a year, and after events such as a new owner, a financing round, or a large change in revenue. A fixed price and a policy amount that no longer track the business are the two most common ways a buy-sell plan fails.

Draft your buy-sell agreement and collect every owner's signature at app.aidocx.ai, free to start.

This guide is general information, not legal advice, and buy-sell, tax, and estate rules vary by state and country, so consult a licensed attorney and a CPA before you sign.