Business Succession Planning: Buy-Sell Agreements, Buyers, and Deal Terms That Protect Value

Succession planning covers two different events. One is planned: you decide to sell or hand over the business on your own schedule. The other is not: an owner dies, becomes disabled, or wants out suddenly. Most owners think about the first and leave the second to chance, even though the second is where the worst outcomes happen, such as heirs who own half the company and no agreement on price.

This guide covers both, with the rules and numbers that changed recently: a 2024 Supreme Court case on buy-sell agreements, the SBA's 2025 and 2026 lending rules that shape what buyers can pay, and the tax rules for ESOPs and installment sales.

Start with the buy-sell agreement

Every business with more than one owner needs a buy-sell agreement. It should answer:

• Triggers. Death, disability, retirement, termination of employment, divorce, bankruptcy, and deadlock.
• Who buys. The company (entity redemption), the other owners (cross-purchase), or a mix with options for each.
• Price. A fixed price updated annually, a formula, or an independent appraisal at the time of the trigger. Fixed prices that nobody updates are the most common failure.
• Funding. Life insurance for death, disability buyout insurance for disability, and installment terms for everything else.
• Payment terms. How long the buyer has to pay and what security the seller gets.

The Connelly problem

In Connelly v. United States (June 2024), two brothers owned a building supply company. The company held $3.5 million of life insurance on each and was obligated to redeem a deceased brother's shares. When Michael died, his estate was paid $3 million. The IRS counted the $3 million of insurance proceeds used for the redemption as a company asset, valued the company at $6.86 million, valued Michael's 77.18% stake at about $5.3 million, and assessed another $889,914 of estate tax. The Supreme Court agreed unanimously: the insurance is an asset, and the obligation to redeem shares does not offset it.

An illustration of what that means for a typical agreement: two equal owners, a company worth $4 million from operations, and a $2 million company-owned policy on each. When one owner dies, the company is worth $6 million at the moment of death, so the estate's half is valued at $3 million for estate tax. If the agreement pays the estate only $2 million, the estate is taxed on value it never receives.

With the federal estate tax exemption at $15 million per person in 2026, many owners will owe no estate tax either way. The case still matters for larger estates, for owners in states with lower estate tax thresholds, and for any agreement whose price is supposed to reflect fair value. Common fixes include cross-purchase agreements where owners hold policies on each other, a separate entity that owns the policies, and valuation clauses written with Connelly in mind. Review this with an estate attorney; see our estate planning guide and trust planning guide.

Choosing who buys

For reference, BizBuySell's Q2 2026 Insight Report found a median sale price of $349,250 for businesses sold on its platform, an average multiple of 2.7 times cash flow, and median cash flow of $155,921. 78% of buyers surveyed expected to use SBA financing, which is why SBA rules matter so much for small business sellers. Larger companies are valued on EBITDA with professional management in place; see our business valuation guide for the methods, and our M&A due diligence guide for what a buyer will examine.

SBA rules and seller notes

Most individual buyers of smaller businesses use SBA 7(a) loans, and the SBA's rules shape deal terms. Under SOP 50 10 8, in effect since June 1, 2025:

• A complete change of ownership requires a buyer equity injection of at least 10% of total project costs.
• A seller note can count for no more than half of that injection, and only if it is on full standby, with no principal or interest paid, for the entire life of the SBA loan. The previous rule allowed a two-year standby.
• In a partial change of ownership, a selling owner who keeps any stake must guarantee the loan, generally for at least two years.

SOP 50 10 8.1 applies to loans that receive an SBA loan number on or after October 1, 2026. It keeps the full-standby requirement and caps limited equity sources, including seller standby notes and minority investors, at half of the required injection. Check the current SOP with your buyer's lender before agreeing terms.

An illustration: a $2 million acquisition. The buyer must inject $200,000. The buyer puts in $100,000 cash, the seller carries a $100,000 note on full standby, and the SBA loan covers $1.8 million over 10 years. The seller receives $1.9 million at close and nothing on the standby note for a decade. Treat a standby note like equity you may or may not collect, and price the deal accordingly.

Management buyouts and seller financing

Managers rarely have the cash to buy the business outright, so MBOs often involve a large seller note paid from the company's future cash flow. The seller takes business risk without control. Protections worth negotiating:

• as much cash at close as a bank or SBA loan can support
• a security interest in company assets, subordinate to the senior lender, with a subordination agreement that spells out when you can be paid and when you can act
• personal guarantees from the buyers
• financial covenants and reporting rights while the note is outstanding
• cross-default, so a default on the senior loan triggers your rights too

For taxes, an installment sale under Section 453 lets you recognize gain as payments arrive. If installment obligations arising in a year exceed $5 million and are still outstanding at year end, Section 453A charges interest on the deferred tax, which reduces the benefit for larger deals. Depreciation recapture is taxed in the year of sale regardless of when you are paid.

ESOPs

An employee stock ownership plan buys shares through a trust for employees. The main tax rules:

• Section 1042 deferral. For a C corporation, if the ESOP owns at least 30% after the sale and you held the shares at least three years, you can defer capital gains by buying qualified replacement property (stocks and bonds of US operating companies) within the window from three months before to twelve months after the sale. SECURE 2.0 extends a limited version, deferral of up to 10% of the gain, to S corporation owners for sales after 2027.
• S corporation ESOPs. An S corporation wholly owned by an ESOP generally pays no federal income tax on its profits, which frees cash to repay acquisition debt.
• Price cap. The ESOP can pay no more than fair market value, as determined by an independent appraiser. The Department of Labor scrutinizes ESOP valuations, and overpayment claims are a common source of litigation.

ESOPs work best for profitable companies with at least a few dozen employees, stable cash flow, and an owner willing to accept fair market value, often with some seller financing. Our ESOP guide covers the mechanics.

Family transfers

With a $15 million per-person exemption (indexed from 2027) and a $19,000 annual gift exclusion in 2026, most family business transfers can now be made without federal gift or estate tax. Tax is no longer the main obstacle. The harder questions are:

• Is the successor capable and willing, and do other family members agree?
• How do you treat children who do not work in the business fairly? Non-voting shares, life insurance, or other assets can balance an estate without splitting control.
• Will you keep income from the business? Many transfers combine gifts with an installment sale or a salary or consulting arrangement for the parent.

If the company is a C corporation, check whether any stock qualifies for the Section 1202 exclusion. For stock issued after July 4, 2025, the exclusion is 50%, 75%, or 100% after three, four, or five years, up to $15 million per issuer; older stock follows the prior five-year and $10 million rules. Our capital gains guide covers this.

Preparing the company

Buyers pay for earnings they believe will continue without you. Three to five years before a planned exit:

• Reduce owner dependence. Delegate key customer relationships, pricing decisions, and supplier negotiations, and build a second layer of management.
• Clean up the books. Accrual accounting, separated personal expenses, and at least reviewed (ideally audited) financial statements. A quality-of-earnings report before going to market avoids surprises.
• Address concentration. A customer above roughly 15% to 20% of revenue will lower the price or lead to an earnout.
• Document contracts and processes. Customer contracts that are assignable, leases with enough term remaining, and written procedures.
• Know your number. Work out what you need after tax from the sale to fund retirement, then compare with a realistic valuation.

A checklist

1. Sign or update a buy-sell agreement, review it for Connelly, and confirm the insurance amounts match current value.
2. Get a valuation from a credentialed appraiser and update it every year or two.
3. Decide which buyers are realistic and what each would mean for your cash at close.
4. Coordinate the plan with your estate plan and retirement income needs.
5. Start reducing owner dependence now; it takes years, and it raises value whichever exit you choose.

For how buyers finance larger deals, see our guides to leveraged buyouts and strategic M&A.

This guide is for informational purposes only and does not constitute legal, tax, or financial advice. Succession planning involves corporate, tax, estate, and securities law; work with a qualified attorney, CPA, and valuation professional.