Buy and sell agreements are used by businesses to divide the shares or interest of owners who are deceased, disabled or wishing to divest their ownership stake. The idea is to neatly and orderly make an ownership change– and to have those transition plans ready before they are needed. Life insurance is a common way to fund buy and sell agreements, with either the company or the owners of the company paying the premiums and using the proceeds to make the agreed-upon ownership transfer when needed.
Two common examples of buy and sell agreements are cross-purchase agreements and entity-purchase agreements. Here’s how they work:
- Cross-purchase agreements: the company’s other owners collectively combine to buy a departing owner’s stake. In this instance, owners might take out insurance policies on each other.
- Entity-purchase agreements: the company itself to purchase the stake of departing or deceased owner.
When executed well, buy and sell agreements can offer businesses some key advantages, with the smooth, in-writing transition of ownership perhaps the biggest one. Companies who have done their succession planning well can unwind an ownership stake without unduly affecting their ongoing business operations.
Nevertheless, buy and sell agreements can be complicated. And companies must be vigilant. If life insurance policies are used to fund the agreements, the premiums must be paid. Furthermore, professional advice is a must when constructing buy and sell agreements considering the taxation and legal ramifications in any potential ownership change.
For more information on whether buy and sell agreements are a good fit for you, contact The Plexus Groupe on the Web or at 847-307-6100 (Chicago – Deer Park), 972-770-5010 (Dallas) and 405-241-9462 (Oklahoma City).
Nationwide.com, “Buy/Sell Agreements and Life Insurance for Business Owners.”
Us.Axa.com, “Funding a Buy-Sell Agreement with Life Insurance.”
Burrage, Thomas F. and Hoekstra, Chad. “Make the Most of Buy-Sell Agreements.” Chad. Journal of Accountancy, October 1, 2004.
Cassels, Ashley. “Buy-Sell Agreements: Does My Business Really Need One?” U.S. Small Business Administration, July 19, 2011.
Morgan Stanley Smith Barney LLC, “How Can a Buy-Sell Agreement Help a Business Owner?”