Buy Sell Agreement Between Shareholders and a Corporation
BUY-SELL AGREEMENTS
Introduction
A buy-sell (business purchase) agreement is an agreement
between the owners of the business for purchase of each others interest
in the business. The buy-sell can be triggered in the event of the
owner's death, disability, retirement, withdrawal from the business or
other events.
Reasons For The Agreement
The Agreement Basics
The agreement provides for the purchase price, terms and funding
arrangements. The agreement obligates the retiring or disabled owner or
owner's estate to sell the business to the business itself, or to the surviving
owner(s), or maybe an option of either.
Types Of Agreements
The Buy-Sell agreements can take several forms, such as:
Basically, these are either a Cross Purchase Plan or Entity
Purchase Plan.
Cross Purchase Agreement
Each partner agrees with each of the other partners to purchase
his or her share of the business at the time of death. The Partners may
take out a life insurance policy on the life of the other(s) to fund the
obligation. At the time of the first death, the surviving partner(s)
collects the insurance proceeds. The survivor then uses the insurance
proceeds to buy the business share from the deceased's family. This
type agreement can be used with two or more partners.
Entity Purchase Plan
Each partner agrees that upon death his or her share of the business
will be sold back to the business. The business may buy life insurance
policies on each of the partners to fund the obligation. At the death of
a partner, the business collects the insurance proceeds and buys the business
interest from the deceased partner's heirs.
Transfer Restrictions
The agreements commit the owners not to sell ownership in
the business prior to death, without first offering it to the persons named
in the agreement. This is called a right of first option or refusal.
Life Insurance to Fund the Agreement
Whole life insurance has generally been used to fund a
buy-sell agreement.
The life insurance industry also offers "Business Value Life Insurance"
with a death benefit determined by the value of the business rather than
the terms of the policy. The death benefit can grow as the value of the
business grows. Premiums may also be higher as the death benefit increases.
Purchase Price
The purchase price can be based on an appraisal, set predetermined
price, book value, or a formula of assets and earnings.
Payment Terms
Agreements may provide that the price will be paid in cash,
in installments, or other means. You may also select a combination of cash
and installments. Of course, if the insurance proceeds are sufficient to
pay the price in cash many agreements provide that the purchase is to be
paid in full in cash from the insurance proceeds.
