Business Solutions

Executive Benefits » Buy-Sell Agreement Funding

 

Buy-Sell Agreement Funding
A buy-sell agreement is a common business continuation tool that can be used with all types of businesses. It stipulates that upon the death, retirement, disability or other withdrawal of a principal, his or her share of the business must be sold to the remaining partners/shareholders or the business.

Therefore, the agreement can:

• Ensure continuity and orderly transfer of ownership
• Establish the value of a business and thereby set a fair selling price
• Provide liquidity
• Guarantee a buyer
• Prevent conflict with surviving owners and keep new or unwanted owners out of the business

There are two main forms of buy-sell agreements:

Cross Purchase
In an insurance-funded cross-purchase arrangement, each business owner buys an insurance policy on the other, naming themselves as beneficiary. At the death of one of the owners, the surviving owner receives tax-free insurance proceeds to use in purchasing the deceased owner's stock from his or her estate.

Stock Redemption
In an insurance-funded stock-redemption arrangement, the corporation purchases the stock of a deceased shareholder. Here the business is the owner and beneficiary of life insurance policies on each shareholder. A partnership looking for a business continuation plan may use a similar arrangement called an entity purchase.

 

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