Buy Sell Agreement Review Checklist for Business Owners

A buy sell agreement review checklist can be run in an afternoon, and it answers four questions: does the paper match the company today, does the price still make sense, is the funding still large enough, and do the triggers cover more than death. If any answer is no, the agreement may not do what you think it will when it matters.

Why a Buy Sell Agreement Needs a Yearly Look

Most owners sign a buy-sell agreement once and file it. The company keeps changing. Revenue grows, a partner joins, a child comes into the business, a loan gets signed, and the agreement sits in a drawer describing a company that no longer exists.

The 2022 MassMutual Business Owner Perspectives Study found that only about one-third of business owners have a buy-sell agreement in place, and that of those who do, over half may not be properly funded. The same study connects that gap to agreements that have gone stale.

An agreement can fail quietly for years. It usually shows itself on the day someone dies, becomes disabled, or wants out.

Your Buy Sell Agreement Review Checklist, Step by Step

Pull out the signed agreement, the policy statements, and your latest financials. Work through the steps below in order, and write down every answer that is "I'm not sure."

Step 1: Does the Paper Match Reality?

Four quick checks catch most stale agreements:

• Are the owner names current?
• Is the company's legal name the one on the agreement?
• Do the ownership percentages match today's records?
• Is every required party included, such as a spouse who has to consent or a new owner who never signed?

Step 2: Does the Price Still Fit the Company?

The valuation clause is where agreements tend to break. A fixed price is simple, but it can fall far behind the company's real value after a few good years. A formula can age better, though it still needs a look when the business changes. Leaving the price to an appraisal at the time of the event can invite a dispute between two appraisers who use different methods.

Ask whether the number or formula would still feel fair to your family and to your partners today. Our guide on how to value a business for a buy-sell agreement walks through the common approaches.

Step 3: Is the Funding Still Sized to the Price?

This is the step owners skip. Compare the current price to the death benefit on each policy. If the business has doubled in value and the coverage hasn't moved, the survivors may owe a family far more than the insurance pays.

• Is each policy still in force, with premiums paid and no lapse notice?
• Does the death benefit cover the buyout price, or only part of it?
• Does the policy owner also serve as the beneficiary, and does that match the structure of the agreement?
• If a company owns coverage on an owner or employee, was written notice and consent given before the policy was issued? According to the IRS, employers report employer-owned life insurance contracts on Form 8925.

Our overview of buy-sell agreement funding with life insurance explains how the pieces fit together.

Step 4: Do the Triggers Cover More Than Death?

Many agreements cover death and stop there. For each event below, ask whether the agreement addresses it, how it is defined, what price applies, and how the buyout is paid:

• Death
• Disability, including how long it must last before the trigger applies
• Divorce
• Bankruptcy
• Retirement
• Firing or leaving the company
• An outside offer to buy the business

Insurance can fund some of these and not others. Divorce, bankruptcy, and retirement typically have to be funded from cash flow or over time. Disability is a judgment call that needs a real conversation about cost and risk. Read more in disability buyout coverage vs life insurance.

Step 5: Is the Structure Still the Right One?

A cross-purchase agreement and an entity-redemption agreement carry different tax and administrative consequences. A structure that fit two owners may be clumsy with four. A 2024 Supreme Court decision, Connelly v. United States, is one reason owners with a redemption agreement should ask an attorney for a fresh look.

Be careful before moving policies around. Transferring an existing policy can raise the transfer-for-value rule, which can make part of a death benefit taxable. That is a question for your attorney and CPA, and our post on the transfer-for-value rule explains why.

Step 6: Do the Other Documents Agree?

A buy-sell agreement does not stand alone. Gather the operating agreement or bylaws, employment agreements, loan documents, and each owner's will or trust. A common problem is an operating document that blocks a transfer the buy-sell requires. Also list every life and disability policy with its owner and beneficiary, so nothing depends on memory.

What to Do With Your Answers

Circle every item where the agreement and reality have drifted apart. Then split the list by who handles it.

• Your attorney drafts and amends the agreement itself.
• Your CPA confirms how the tax pieces apply to your entity.
• Cornerstone reviews the insurance, checks that coverage matches the price and the structure, and arranges changes where they make sense.

We don't draft or amend legal documents. We help you see the gaps and bring a clear list to the people who can fix them. For more on the full picture, see our business owner strategies, or schedule a conversation and we'll go through your coverage together.