Buy Sells

A chief concern business owners have is what would happen to the business if one of the owners could no longer continue.  Surviving owners generally want to ensure a continuity of ownership and management without having the departing owner's successor thrust upon them.  Nor do they want to unduly compromise the liquidity needs of the business by funding a significant buyout.  A properly drafted buy-sell agreement can achieve all of these goals by:

• Providing that upon the occurrence of a specified "trigger event", owners are guaranteed that their interest in the business will be purchased
• Providing that the owner's interest must be sold to the company, the remaining owners, or a combination of the two
• Providing a mechanism whereby the purchase price may be determined by market conditions in existence upon the occurrence of the event
• Providing a funding source, primarily through insurance policies, so that the liquidity needs of the business or its owners will not be onerous
• Establish a valuation of a deceased owner's interest in the businesss for estate tax purposes

 Triggering Events

• Death or Disability
• Retirement of the owner
• Owner Divorce or Bankruptcy

Insurance can be used to provide the funds necessary in a buy out in the event of an owners death or disability.  The terms of the buyout will include the determination of disability, the time for payment to the owner or owners estate (beneficiary), whether the entity or the surviving shareholders have the obligation to purchase the interest and whether the funding mechanism, such as life or disability insurance, should be maintained by the entity or the owners personally.

 Types of Buy-Sell Agreements:

• Entity Redemption Agreement - Under this plan, the business entity is obligated to purchase the owner's interest. The entity purchases the life insurance is the owner and beneficiary of the policy on the business owner(s). The proceeds should be received by the entity free of ordinary income taxes, pursuant to IRC, section 101.
• Cross-Purchase Arrangements - Under this plan, each surviving owner of the business becomes personally obligated to purchase the departing owner's interest. Each owner would buy a life insurance policy on the other owners. At death of one of the owners, the proceeds of the life insurance policy would be received tax-free by the surviving owners and then be used to purchase the deceased owner's interest .
• The Wait and See Arrangement - Known as the "mixed agreement", attempts to give the entity and its owners maximum flexibility at the time of the triggering event. Generally, the entity has the initial option to purchase the shares from the departing owner in the entity redemption agreement. Should the advantage of the entity redemption outweigh the disadvantages, then the entity shall exercise its right to purchase the owner's interest. If the entity fails to exercise its option, or purchase the owner's interest, then the surviving owners have an option to purchase the departing owner's interest in a cross-purchase arrangement. To the extent that this second option does not result in a complete purchase of the departing owner's interest, then the entity must complete the purchase.
• Trustee Buy-Sell Arrangement - Very similar to the cross-purchase agreement, but instead of multiple owners buying life policies on each other, it allows the trustee to purchase allowing only one policy per owner to be purchased. At death of one of the owners that policy is used to fund the buyout.
• Disability Buy Out Arrangement - Policy that finances the purchase of the shares of a totally disabled partner or shareholder (of a closely held company) by the other partners or shareholders.

For a personalized solution for your client's need please contact us at 866.452.3670, or email us at sales@pipaclife.com.