The importance of a strategic and sound buy-sell agreement to a company’s long-term success simply can’t be overstated. A business that is built to last must have legally binding purchase agreement in place stating when and how a co-owner’s share can be purchased and for how much. Typically triggered by retirement, divorce, bankruptcy or death, the best buy-sell agreements protect the interests of business partners (and their spouses) while they protect the company’s profits during times of transition. Life insurance policies can be powerful tools for these critical buyouts—but only if you understand the pros and cons.
What type of buy-sell agreement is best for your company?
At Nicolosi | Galluzzo, our legal and insurance experts carefully craft customized buy-sell agreements for a wide range of clients, from closely held businesses to large public corporations. We know that there is no one-size-fits-all solution; surrounding circumstances must always be taken into account. However, broadly speaking, most companies will find themselves choosing between one of the two most common types of buy-sell agreements: cross-purchase life insurance agreements (also known as cross buy) and redemption agreements.
Cross-purchase, buy sell agreements are typically used as a small business solution and, in my opinion, are the best option for a closely-held family business or a closely-held company (a company with a limited number of shareholders). In most cases, a redemption of shares agreement will work best for larger companies. Both types of buy-sell agreements utilize life insurance policies for payouts and stock repurchase but differ in how the payouts are structured. No matter what your company’s current size, understanding the positive and negative impacts of using life insurance for a purchase agreement is critical to crafting the right buy-sell agreement for your company or family business.
The advantages of using life insurance policies for buy-sell agreement payouts
The disadvantages of using life insurance policies for buy-sell agreement payouts
At Nicolosi | Galluzzo, we have years of experience determining the appropriate balance between the financial interests of co-owners and the company’s cash flow and long-term stability. We help our clients maximize the potential of life insurance policies as funding mechanisms for buy-sell agreements while mitigating the expense and risk.
If your company or family business is engaged in long-term succession planning, sit down with a personal advisor from our skilled Business Transition team today.