What are the different types of buy-sell agreements?
There are three main types of buy-sell agreements:
- One-way buy-sell agreements
- Cross-buy-buy-sell agreements  ] Entity-Purchase Buy-Sell Agreement
One-way Buy-Sell Agreement
A one-way buy-sell agreement arises when there is a sole owner of a business. There are no co-owners to take over naturally if the owner dies.
Many sole proprietorships do not survive their owners due to lack of succession planning. A one-way buy-sell agreement can help ensure the company's future success.
How does a one-way buy-sell agreement work?
In a one-way buy-sell agreement, the sole owner commits to sell, and the buyer commits to buy the business interest a specific event occurs. This event is usually the death of the owner. The buyer is preferably one of the company's employees.
The purchase price is predetermined and defined in the agreement. The price is determined either by a fixed price, which should be revalued from time to time, or a formula specified in the agreement.
The buyer buys a life insurance policy on the entrepreneur's life in an amount corresponding to the purchase price. In the event of the entrepreneur's death, the buyer buys the owner's share of the estate. the named buyer before attempting to sell it to a third party.Only after the named buyer declines the offer, the owner can make a third-party sale.
Cross-Purchase Buy-Sell Agreements
A cross-purchase buy-sell agreement is an agreement between entrepreneurs where all owners commit to buying another owner's business interest if a certain event occurs, typically death.This type of buy-sell works well for companies with two to three owners who are all relatively close in age.
How does one cross-purchase buy-sell agreement?
With a cross-purchase buy-sell agreement, each business owner agrees to buy part of a deceased owner's business interest. To finance this, each owner buys a life insurance policy for every other owner's life. The total coverage amount for each insurance should correspond to the total purchase price for that owner's share of the business.
John, Sue and Joe own equal shares in a company valued at $ 3,000,000. Therefore, each of their shares is worth $ 1,000,000.
John buys a $ 500,000 life insurance policy on Sue and a $ 500,000 life insurance policy on Joe.
Sue buys a $ 500,000 life insurance policy on John and a life insurance policy of $ 00 for John and a life insurance policy of $ 500. Joe.
Joe buys a $ 500,000 life insurance policy on John and a $ 500,000 life insurance policy on Sue.
Each owner is insured with a total of $ 1,000,000, their share of the business. If an owner dies, each of the surviving owners uses the $ 500,000 death benefit to purchase the total share of $ 1,000,000 from the deceased owner's estate.
It is advisable to use cross-purchase agreements when the owners are relatively old. This is because the life insurance premiums that insure a young person are very different than they would be on an older person. It would not be fair if a 35-year-old co-owner paid insurance premiums on a 65-year-old co-owner.
In addition, a cross-purchase agreement is best if there are only a few owners involved. With the example above, there are six total life insurances for three owners. What if the company had six owners. Then there would be a total of 30 life insurances because each owner must own an insurance on every other owner. This can be quite complicated and a lot to deal with.
For companies that have large differences between the ages of owners or several owners, a buy and sell agreement would be best.
Entity-Purchase Buy-Sell Agreements.
A buy-sell agreement for companies is ideal if there are many business owners or if the owners' ages are very different.
How does a buy and sell agreement between companies work?
With a unit-buy buy-sell, the business unit agrees to purchase a deceased owner's share from the deceased owner's estate at a predetermined price.
The company needs each owner's consent to purchase a life insurance policy for his life. The insurance cover should correspond to the purchase price for that owner's share of the business.
The company also has access to the insurance's cash values in a purchase and sale agreement between companies. This is usually not allowed with cross-purchases and one-way purchases.
In summary …
Buy-sell agreements are so important for a company. They ensure a smooth transfer of ownership after a potentially disruptive event.
Buy-sell financed with life insurance solves three problems:
- Determining a price for business interest,
- Getting a buyer,
- Securing where there are funds to complete the terms.
Quotas can help you get life insurance plans in place for your buying and selling agreements. Contact us directly or go to our life insurance quote tool to see estimated prices.