A buy-sell agreement is a legally binding contract that defines how a business owner’s share will be transferred if they die, become disabled, or leave the business. It protects business continuity, ensures ownership stays within agreed parties, and sets a fair, predetermined process for ownership transition. Life insurance is commonly used to fund the agreement, providing immediate liquidity to buy out the departing owner’s share while minimizing disruption and ensuring a fair payout.

• Cross Purchase Agreement

  Each owner takes out a life insurance policy on the other owners, and the surviving owner uses the policy proceeds to purchase the deceased owner's share.

  When a surviving owner buys the deceased owner’s share, they receive a step-up in tax basis. This can reduce capital gains taxes if the business is sold later.

  Since individuals own the policies, there's typically no alternative minimum tax (AMT) or corporate tax exposure on death benefits.

• Entity Purchase Agreement

  An Entity Purchase Agreement (Redemption Agreement) is a type of buy-sell agreement where the business itself is the beneficiary and agrees to purchase an owner’s share if that owner leaves the business—due to death, disability, retirement, or another trigger event.

  Surviving owners don’t receive a step-up in cost basis for tax purposes like they would in a cross-purchase agreement. In C corporations, the insurance payout may create Alternative Minimum Tax (AMT) exposure.

  The business must stay financially healthy to maintain the insurance and complete the buyout. This is best for businesses with 3 or more owners, corporations or LLCs wanting administrative simplicity, and companies comfortable handling the funding and insurance policies centrally.

• Wait and See (Hybrid) Agreement

  A Wait-and-See Agreement (Hybrid Buy-Sell Agreement) is a flexible buy-sell agreement that delays the decision of who will buy a departing owner's share until a triggering event (death, disability, or retirement) occurs.

  Upon a triggering event, the agreement typically follows this sequence:

  1. The business (entity) has the first option to purchase the departing owner’s share.
  2. If the business declines or partially buys, the remaining owners have the second option to buy all or part of the share.
  3. Any portion not purchased by the business or the owners must be purchased by the business.

  The benefit of the Wait-and-See Agreement is that it offers maximum flexibility by allowing owners to evaluate the business’s financial position and tax considerations at the time of the event. Owners can choose the most tax-efficient method. With this arrangement, it can adjust to future changes in ownership, financial health, or tax laws.

• How do you fund a Buyout?

  Funding a Buy-Sell Agreement is one of the most critical parts of making it work. Without a clear funding plan, the agreement may fail when it's needed most.

  Life insurance is the most common and effective way to fund a buy-sell agreement when the trigger event is death. Most businesses use life insurance for death, disability insurance for incapacity, and installments or cash reserves for other scenarios like retirement or voluntary exit.

• What is Fair Market Value?

  Buy-sell agreements often include a valuation method to ensure a fair price is paid for the departing owner's share, which can be crucial for both the remaining partners and the deceased owner's estate.

• Who are the beneficiaries in a Buy-Sell Agreement?

  In most cases, the surviving owner(s) or the business itself are named as the beneficiaries of the life insurance policies.

• What are the tax implications of a Buy-Sell Agreement?

  While premiums are generally not tax-deductible, the death benefit proceeds received are usually not subject to income tax, making it an attractive way to fund buy-sell agreements.

• What is Key Man Insurance?

  Key Man Insurance is a life or disability insurance policy that a business takes out on a key employee or owner whose loss would significantly disrupt operations.

  The business owns the policy, pays the premiums, and receives the payout if the insured person dies or becomes disabled.

  This coverage provides critical financial support to help the company recover from lost revenue, recruit a replacement, meet financial obligations, and maintain stability—making it essential for business continuity and investor or lender confidence.