A buy-sell agreement is a formalized business continuation plan that is designed to provide for the orderly disposition or continuation of an individual’s ownership in a business. For remaining owners, a buy/sell agreement provides a way to purchase a business they have a vested interest in but may not have the capital for. It also provides a safety net to surviving owners that the deceased’s share of the business will not pass on to someone unsuitable to the business. It also provides financial continuity for customers, creditors and employees, much like the intent of any life insurance policy.
Buy-sell agreements can take different forms, but the two typical structures are cross-purchase plans and entity redemption plans, with a hybrid version also available as a third possible option.
- Cross Purchase Plan. Each business owner buys a life insurance policy on each of the other owners of the business. The individual business owners pay the premiums. Upon the death of an owner, the surviving owners use the death benefit to purchase the deceased owner’s share of the business.
- Entity Purchase or Stock Redemption Plan. The business purchases separate life insurance policies on the owners. The business pays the premiums. The business is the owner and beneficiary of the policy. When an owner dies, his or her share of company stock will pass to his or her heirs or estate. The business may use the life insurance proceeds to buy out the interest from the estate.
- Hybrid Plan. This combines the first two types of buy–sell agreements
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