What is a Buy-Sell Agreement and why does my business need one?

The owner of a company wants to ensure a smooth transition and protect the family’s interests in the event of death.  While there are many strategies available, a buy-sell agreement among partners/shareholders and/or employees can help accomplish this goal.

The buy-sell agreement is a contract that obligates, upon the death of the owner, that the deceased executive’s estate sell, and the remaining partners/shareholders purchase the business interest of the company (at a specified price).  The heirs don’t have to worry about running the business, they receive a fair price for the sale, and they avoid many of the delays associated with probate.  The surviving owners don’t have to worry about interference from possibly unwanted partners (heirs), they know the purchase price beforehand, and they remain in good standing with clients and lenders.

How can I fund the Buy-Sell Agreement?

There are a few options:

  • Wait and Pay Cash.  At death, there may not be enough cash available to fulfill the agreement.  You may have to liquidate assets that can’t be readily sold (e.g., real estate).  You also lose the investment value of the assets that you can liquidate.  This option uses 100% of your own after-tax money!
  • Wait and Borrow Funds.  By securing additional loans, you may stymie future growth by increasing expenses.  Lenders may balk at other loans needed to expand the business.  Remaining partners/shareholders may have to sign personally to secure the loans, thereby exposing personal assets to creditors.  This option uses 100% of your own money plus additional interest!
  • Purchase Insurance.  Proceeds are immediately available upon death, income tax free.  Premiums could be less than just the interest required on a loan.  This option uses 100% of somebody else’s money (i.e. the insurance company) for pennies on the dollar!


How are Buy-Sell Agreements structured?

While other funding arrangements can be structured, the cross purchase agreement and entity plan remain the more popular options.

  • Cross Purchase Agreement.  The owners purchase a policy on each other, and pay the premiums themselves.  The proceeds are paid to the surviving individual(s), and the surviving individual(s) buys the interest according to the agreement.  This arrangement works well when the owners/partners/shareholders are approximately the same age and in the approximate same level of health.  A major advantage of the process lies in the increased cost basis for the business interest acquired – when the business is subsequently sold, there are far fewer taxes to be paid.
  • Entity plan.  The business purchases the policy on each of the owners, pays the premiums, and receives the proceeds upon death.  The proceeds are used to purchase the business interest from the heirs, and the remaining partners/shareholders own the company in its entirety.


How can I get a quote for Buy-Sell Agreement Life Insurance?

Given the more complex nature of a buy-sell agreement and the use of life insurance to fund the agreement, it would be best to give us a call at 1-888-972-0024 or CLICK HERE to send us an e-mail so we can help you review your personal situation in further detail and set up the policy that best suits your individual needs.  You can also instantly compare quotes by CLICKING HERE.