more about Buy-Sell Agreements
are 2 basic forms of Buy-Sell Agreements
Cross purchase agreement.
a cross purchase agreement, the owners of the business
enter into the buy-sell agreement among themselves obligating
example, Frank & Joe are equal shareholders of X
Inc. Under the cross purchase agreement Frank and Joe
each agree to buy the other's half of the business in
the event of the other's death, disability or retirement.
To fund the agreement, each buys a cash value life insurance
policy on the life of the other.
The cross purchase agreement is very popular with companies
having few owners. The surviving owners benefit from
an increase in their cost basis when the purchase is
ultimately made. The cross purchase agreement becomes
more difficult to fund when their are more than two
example, if Frank and Joe were joined by Tom a total
of six life insurance policies would be required. Also,
the premiums on the policy may vary based on the ages
and health of the owners.
Entity purchase agreement (also
called a redemption agreement)
The owners of the business contract with the company
itself. The company is then obligated to buy the share
of the owner who has died, retired or become disabled.
If the agreement is funded, the policies are owned by
the company. Redemption agreements can be structured
to take advantage of special estate tax rules (Sec.
303) and they may reduce the number of policies required.
By utilizing some form of a Buy-Sell Agreement, the
small business owner insures the continuance of the
business he/she has worked so hard to create. This makes
life much easier for the remaining partner(s) in the
business as well as the family members.
advantages of a Buy-Sell Agreement