Buy-Sell Agreements

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The death or disability of a business owner may result in a significant interruption of business operations and put at risk the time and effort that has been spent building the business. Buy-sell agreements are tools used to mitigate such risk in the event of an unforeseen circumstance involving a business owner.

Buy-sell agreements typically take one of the following two forms:

  1. Cross Purchase Agreements

    Cross purchase agreements, which are typically used with multiple owner businesses, use life insurance to fund the buy-out of a portion of the business upon the death or incapacity of one of the business owners. The death or disability benefit of the insurance policy is then used to purchase and transfer shares to the remaining business owners while providing liquidity to the exiting owner and his or her family.

  2. Entity Purchase Agreements

    Entity purchase agreements or stock redemption plans are generally used to facilitate the sale of stock from a business owner participating in the agreement. As part of this plan, the business purchases life insurance contracts on each of the owners of the company and pays the related premiums. In the event of the death or disability of one of the owners, the business may use the life insurance proceeds to purchase the stock from the owner’s estate.

Buy-sell agreements should be considered by most business owners as they provide numerous clear-cut advantages which include the following:

  • Liquidity is provided for the purchase of the business.
  • Heirs receive cash to pay expenses, income and estate taxes.
  • The agreement provides for an orderly transfer of ownership, management and wealth.

Among other things, such plans furnish a business owner’s heirs with a guaranteed a buyer for a business that they may not want to manage or own. In addition, the remaining business owners are relieved of the concern that, upon the transition of another owner’s share, they will be stuck with an unsuitable business owner. As with most types of business succession planning, a buy-sell agreement must be considered prior to the event for which it will be used so timing is of the essence.

If your business is interested exploring the advantages of drawing up a buy-sell agreement to protect the interests of business owners and their heirs, the experienced professionals at CGT Solutions can provide you with the expertise you are looking for.

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