Business Succession Planning
What is a Buy-Sell Agreement
A buy-sell agreement may be thought of as a sort of "premarital agreement" between business partners/shareholders. It is sometimes called a 'business will'. An insured buy-sell agreement (agreement funded with life insurance on the participating owner's lives) is often recommended by business succession specialists and financial planners to ensure the buy-sell arrangement is well-funded and also to guarantee there will be money when the buy-sell event is triggered.
Where do we find a Buy-Sell Agreement
A Buy-Sell Agreement can typically be found in a company’s Shareholder Agreement.
Basic types of Buy-Sell Agreements
There are two basic types of buy-sell agreements: Entity Redemption and Cross-Purchase. Each type of agreement holds distinct advantages and disadvantages.
1. Entity Redemption - The business enters into an agreement to purchase the share of a shareholder upon a triggering event.
- With more than 2 shareholders (and if funded by insurance) this plan is easier to manage;
- Equalization of payments for insurance since the business is paying;
- The cash value of any insurance policy held for purposes of funding the buy-sell agreement is an available business asset.
- May be unfavorable with regard to the basis of the surviving business owner’s shares should the survivor purchase the shares from the business (although exceptions may be present for S-Corps);
- Policy and cash value are subject to business creditors;
- No deduction for premiums of life insurance;
- Potential increase in value of entity upon death for tax purposes.
2. Cross Purchase - Individual Shareholders enter into an agreement to purchase the share of a shareholder upon a triggering event.
- Income Tax free death benefit of life insurance;
- Insurance is not subject to business creditors;
- Basis increase for stock purchase;
- No ATM for corporation.
- Uses personal income to pay for insurance;
- Possible disproportionate premiums between shareholders;
- Company cannot record policies as assets;
- Administrative complexity.
For a more detailed description, please feel free to contact our firm.