Buy-Sell Agreements

As a successful business owner, a funded exit strategy can help you harvest the value of your business when you leave the company. Through a buy-sell agreement, you select a buyer, determine the purchase price and the funding source for the future sale of your business. It can be triggered at retirement or in the event of your death or disability, and it helps to ensure that you and your family will be financially secure.

How it works

You should work with an attorney to draft a buy-sell agreement between the business owner and the projected buyer.  A buy-sell agreement is most commonly structured as either a cross-purchase or an entity-purchase arrangement.  In the cross-purchase approach, individual business owners purchase life insurance policies on the lives of all other business owners.  It generally works best when there are three or fewer business  owners of relatively equal age and health status, all of whom can be depended upon to make timely premium payments. A
cross-purchase approach also provides the most favorable tax basis for the purchasing owners. In an entity-purchase approach, the business purchases policies insuring the lives of each business owner. This strategy is simpler for businesses with greater than three owners, and it  equalizes premiums paid for individuals of varying ages and health classes. Although premiums are not tax-deductible to the business, the death proceeds are received income tax free, assuming IRS guidelines are met. Be sure to review your proposed plan with your tax advisor.

Funding with life insurance

Life insurance is an ideal funding source for a buy-sell agreement triggered by the death of a business partner. It’s often the most affordable option when compared to a bank loan, a sinking fund, or an installment sale, and the death benefit provides
liquidity precisely when the need arises: upon the death of a  business owner. Further, a permanent policy can accumulate cash value that can help fund a buy-out strategy upon retirement.