For business owners, an unexpected death can threaten not just a family’s finances but the business itself — and the livelihoods of any co-owners, partners, or employees. Business succession planning aims to make sure there’s a clear, funded plan in place before that happens.

The buy-sell agreement

A buy-sell agreement is a legal contract among business owners that spells out what happens to an owner’s share of the business if they die, become disabled, or leave. Without one, a deceased owner’s share can pass to their heirs by default — who may have no interest in or ability to run the business, and may not agree with the surviving owners on next steps.

Funding the agreement with life insurance

A common approach is for the business (an “entity purchase” arrangement) or the co-owners individually (a “cross-purchase” arrangement) to hold life insurance policies on each owner. If an owner dies, the death benefit provides the cash needed to buy out that owner’s share from their heirs at a pre-agreed valuation — without the surviving owners needing to take on debt or sell business assets under pressure.

Key person insurance

Separately, key person insurance covers the loss of an individual whose skills, relationships, or leadership are critical to the business (not necessarily an owner). The payout goes to the business itself, helping cover the cost of recruiting a replacement or offsetting lost revenue during the transition.

Why this needs a team approach

A solid succession plan usually involves a business attorney to draft the buy-sell agreement, an accountant or valuation professional to help set a fair method for valuing the business, and appropriately structured life insurance to fund the agreement. Getting the pieces to work together is what actually protects the business and the families involved.

This article is educational and general in nature. It isn’t legal or tax advice. Buy-sell agreements should be drafted by a licensed business attorney, in coordination with a tax professional.