Glossary
Buy-sell agreement, defined
A contract among the owners of a business that fixes what happens to an owner's share on death, disability, retirement or departure, and how the transfer will be paid for.
In practice
The two common structures are cross-purchase, where each owner holds a policy on the others, and entity purchase, where the company owns one policy on each owner. Life insurance funds the death trigger; disability buyout insurance funds the disability trigger, which is the one owners most often leave unfunded. The valuation method written into the document sets the policy amount, and it should be reviewed as the company grows. Without funding, surviving owners must borrow or pay from cash flow, and a deceased owner's family becomes an unwilling partner. An attorney drafts the document; the agent's job is to match the policies to it.
A worked example
Suppose two partners each own half of a company valued at $1,600,000. Under a cross-purchase plan each holds an $800,000 term policy on the other. When one dies, the survivor receives $800,000, pays the estate for its half, and owns the whole company. Hypothetical figures.
Applies to: Life Insurance