One of the tools we have been frequently using with our small business owner clientelle is the buy-sell agreement. A buy-sell agreement is a legally-binding contract that prepares for the future sale of your business, or for the purchase of a co-owner’s interest.
The three types of buy-sell agreements are:
- Entity Buy-Sell Agreement – The business enters into a written agreement with the owners to purchase the interest of each owner in the event of disability, death, divorce, or departure of a co-owner.
- Cross-Purchase Buy-Sell Agreement – Individual owners agree to purchase the interest of the other owners. Each individual is the owner and beneficiary of a life insurance policy on each of the other owners, and the policy proceeds are used to pay the purchase price.
- Buy-Sell Agreement Using Partnership Administration Succession Strategy (PASS) – Individual owners form a separate partnership and the partnership acquires life insurance policies on all the owners and administers the provisions of the buy-sell agreement. This approach can be very advantageous, due to the tax and accounting rules that apply to partnerships.