Everything you need to know about Entity Purchase Buy/Sell Agreements

Everything you need to know about Entity Purchase Buy/Sell Agreements

Have you thought about what would happen to your business after an owner's death or disability? Business owners may not want to be in business with the departing owner's non-active spouse and/or children. Failing to plan for this transition can be the greatest threat to the business's survival.

A buy/sell agreement provides an orderly process for a business to pass from one owner to another. The individuals agree in writing that the business interest will be sold for a negotiated, predetermined price upon the occurrence of certain events including:

  • Death
  • Disability
  • Retirement
  • Divorce
  • Bankruptcy of Owner

How It Works

An Entity Purchase (or Stock Redemption) Buy/Sell is a written agreement between the business (entity) and the owners of a business for the sale and purchase of business interests. This type of agreement is often used when there are multiple owners.

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Here's the steps:

  1. During the owners lifetime an attorney prepares an agreement under which the business will purchase the business interests of owners.
  2. The business buys a life insurance policy on each owner to fund the buy/sell.
  3. In the event that one of the owners die, the business receives the death benefit and uses it to buy deceased owner's business interest from his/her estate.

Benefits of an Entity Purchase Buy/Sell

To the Business

  • Provides a smooth transition of control and ownership
  • Avoids ownership by unwanted parties and potential disagreements about business decisions
  • Reassures creditors, suppliers, customers, and employees of the continued viability of the business
  • Helps ensure the legacy of your business

To the Owners

  • Binding on all parties and prevents future negotiations and disputes
  • Locks in a buyer for the business interest
  • Helps ensure your heirs will receive a fair value when they sell
  • Time frames and payment terms are agreed upon ahead of time
  • Helps make sure the active owner(s) retain control of the business

Benefits of Using Life Insurance to Fund a Buy/Sell Agreement

  • Liquid cash is immediately available upon an insured owner's death
  • Tax-deferred growth of cash value
  • Death Benefit is generally received income tax free
  • Disciplined means of setting aside funds
  • Policy cash value can be used toward a lifetime buyout or for financial emergencies
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Aaron Peacock

Aaron Peacock

Hi, I'm Aaron and I'm a marketing representative for Federated Mutual Insurance Company - a Ward's Top 50 and an A.M. BEST A+ Superior rated insurance carrier. After my wife was severely injured in an accident involving a distracted driver, I've found one of my passions in life is to help educate people about the Danger of Distracted Driving and have started speaking to businesses in Western North Carolina on implementing the Federated Insurance DriveS.A.F.E. program. Click here to read more...