A business purchase agreement is a type of business succession plan used by businesses with more than one owner. The plan calls for the company to reject a homeowners` life insurance policy at the level of each owner`s interest. In the event of death, the amount recovered by the insurance company, corresponding to the deceased owner`s share, is used to pay the deceased`s estate for its share in the transaction. A version of this article originally published in the September 2019 issue of Thomson Reuters` estate planning journal. Buying and selling agreements are critical when it comes to a narrow business, but are often ignored or briefly shrunk by business owners. Life insurance is an effective instrument for entrepreneurs to implement the provisions of a purchase-sale contract by providing liquidity to their business and family in the event of the death of an owner. A properly developed buy-sell contract is the key to avoiding conflicts and reminding how life insurance income will be used in the event of the death of a business owner. The creation of a separate life insurance unit is increasingly being used by practitioners in the planning of purchase-sale agreements to avoid tax and other pitfalls. What is a purchase and sale contract? More generally, a purchase-sale contract (which can be part of a shareholders` agreement, company agreement, partnership agreement or other agreement) is an agreement between the owners of a tightly managed business that restricts the rights of owners to transfer their shares in the business.
Typically, other owners and the business have the right (and sometimes the obligation) to acquire an owner`s interest when the owner dies or wishes to make a transfer of his or her interests for life. As a result, a properly crafted purchase-sale contract can prevent the interests of a deceased owner from being transferred to others who do not want the remaining owners not to stick to the business, and it can also provide cash for the estate of a deceased owner. The triggering events of a buy-sell contract can go beyond death and voluntary transfers for life. A possible involuntary transfer, such as a transfer that could result from divorce or bankruptcy, may also trigger purchase rights or obligations. Other events may be the permanent disability of the owner or the termination of an owner`s employment with the business. The purchase-sale contract determines how to determine the value of the interests of a transferring owner.. . . .