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.  

Pros:

  1. With more than 2 shareholders (and if funded by insurance) this plan is easier to manage;
  2. Equalization of payments for insurance since the business is paying;
  3. The cash value of any insurance policy held for purposes of funding the buy-sell agreement is an available business asset.

Cons:

  1. 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);
  2. Policy and cash value are subject to business creditors;
  3. No deduction for premiums of life insurance;
  4. 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. 

Pros:

  1. Income Tax free death benefit of life insurance;
  2. Insurance is not subject to business creditors;
  3. Basis increase for stock purchase;
  4. No ATM for corporation.

Cons:

  1. Uses personal income to pay for insurance;
  2. Possible disproportionate premiums between shareholders;
  3. Company cannot record policies as assets;
  4. Administrative complexity.

For a more detailed description, please feel free to contact our firm.