Buy-Sell Agreement
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A Buy-Sell Agreement is a legally binding contract between business owners that outlines what happens to an owner’s share of the business if they die, become disabled, retire, or decide to leave the company.
It ensures a smooth transition of ownership and protects both the business and the remaining owners from financial uncertainty.
Usually, a life insurance or disability insurance policy is used to fund the agreement—so that if one owner passes away, the insurance proceeds provide the money needed to buy out their share from their family or estate.
Types of Buy-Sell Agreements
Types of Buy-Sell Agreements
Cross-Purchase Agreement:
Each owner buys a life insurance policy on the other owners. When one dies, the others use the insurance proceeds to purchase their share.Entity-Purchase (Stock Redemption) Agreement:
The business itself owns the life insurance policies and buys back the deceased owner’s share.
Key Advantages
Key Advantages
Business Continuity:
Prevents disruption and ensures the business keeps running smoothly after an owner’s death or departure.Fair Valuation:
Establishes a clear and agreed-upon value for the business, avoiding conflicts among surviving owners and heirs.Financial Protection:
Life insurance provides the funds needed to buy out the deceased or departing owner’s share—without straining the business’s cash flow.Protects Family Interests:
The deceased owner’s family receives fair compensation without being forced into the business’s daily operations.Prevents Disputes:
Reduces the chance of ownership disagreements or legal battles among partners or heirs.Tax and Estate Planning Benefits:
Helps with estate liquidity and may offer certain tax advantages depending on the structure.
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