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Corporate Life Insurance for Business Continuity

A business partnership is like a marriage but without the romance. There is a financial arrangement where partners share in both the benefits and risks. If one partner, in the event of a premature death or disability, for example, is unwilling to continue with the business, a Buy-Sell agreement sets out how that partner’s interest is transferred. It’s a blueprint to predetermine the sale or transfer of the company or an interest in it based on some specified future event, including the retirement of a partner or owner. It protects all partners and/or family members and provides certainty in the event that an unexpected crisis necessitates a change in leadership.

How A Buy-Sell Agreement Works

A Buy-Sell agreement outlines the terms of a partner’s exit from the business. It determines how a co-owner’s shares are sold, including who can buy them and at what price. Typically, Buy-Sell agreements are drafted with funding provisions, such as an insurance policy, to pay for a buyout. Certain provisions might limit the personal risk held by each partner and shift it to the business entity.

Arroyo can help you structure a Buy-Sell agreement and fund it through a Life or Disability insurance policy. The funding is particularly important if perpetuation of the business is your priority. The payout from an insurance policy can be used to facilitate a quick sale of the business interest to a beneficiary, or it can go to pay estate taxes.

Types of Buy-Sell Agreements

  • Entity Purchase (or Redemption Agreement): In an entity purchase arrangement, the company is put in the position to buy the departing owner’s shares. Generally, the company will take out a Life insurance policy on the life of each of the owners to help fund the entity purchase buy-sell.
  • Cross Purchase: In a cross purchase arrangement, the remaining owners agree to purchase the departing owners’ shares or interest. It is imperative that the owners negotiate a predetermined price or system for determining a price at the trigger date.
  • Hybrid: A hybrid Buy Sell agreement is a mix between an entity purchase and a cross purchase. The remaining owners and the business are required to purchase all of the shares or interest of the departing owner.