What is a buy-sell agreement?


Quick Answer

A buy-sell agreement is a contract that stipulates the transfer of one party's business interest to another party if a certain trigger event occurs in the seller's life. Trigger events include the seller retiring, becoming disabled or dying.

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Full Answer

Life insurance is commonly used to fund the buyer in this agreement. Two frequent examples are through a cross-purchase plan and an entity purchase or stock-redemption plan.

In a cross-purchase plan, every owner in a business purchases life insurance policies on one another. If an owner dies, the death benefit is used to purchase his business share.

An entity purchase or stock-redemption plan is between the business owner and the employees. The business purchases life insurance policies on every owner. If an owner dies, his business share is transferred to his heirs. The business receives the death benefit on his life insurance policy, which can be used to purchase that business share.

A buy-sell agreement has benefits for the buyer and seller. The buyer is able to purchase his partner's share and keep the business going. He doesn't have to be in business with his partner's heirs. Since the agreement is based on the value of the business, the seller guarantees a fair value for his heirs. It makes the process simpler for the heirs, who already have a buyer and don't need to manage the business.

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