By Keith Conley

As a successful business owner, a funded exit strategy can help you harvest the value of your business when you leave the company. Through a buy-sell agreement, you have pre-selected a buyer (your fellow business partner(s)), and determine the purchase price and funding source for the future sale of your business. It can be triggered in the event of your death or other triggering event, and it helps ensure that you and your family will be financially secure.

How it Works

You should work with an attorney to draft a buy-sell agreement between the business and projected buyer (one or all of your other business partners). A buy-sell agreement is most commonly structured as either a cross-purchase or entity-purchase arrangement. In the cross-purchase approach, individual business owners purchase life insurance policies on the lives of all other business owners. It generally works best when there are three or fewer business owners or relatively equal age and health status, all of whom can be depended upon to make timely premium payments. A cross-purchase approach also provides the most favorable tax basis for the purchasing owners.

In an entity-purchase approach, the business purchases policies insuring the lives of each business owner. This strategy is simpler for businesses with greater than three owners, and it equalizes premiums paid for individuals of varying ages and health classes. Although premiums are not tax deductible to the business, the death proceeds are received income tax free, assuming IRS guidelines are met. Be sure to review your proposed plan with your tax advisor.

Funding with Life Insurance

Life insurance is an ideal source for a buy-sell agreement triggered by the death of a business partner. It’s often the most affordable option when compared to a bank loan, a sinking fund, or an installment sale, and the death benefit provides liquidity precisely when the need arises: upon the death of a business owner. Furthermore, a permanent policy will accumulate cash value that can help fund a buy-out strategy upon retirement.

The Benefits

  • A buy-sell agreement provides for the orderly transfer of your business interest, ensuring it is not sold to outsiders or left to the control of partners family members.
  • A buy sell agreement can create a degree of stability that may be important to creditors.
  • Buyers and sellers agree to a fair price now, rather than waiting until urgent circumstances potentially reduce the asking price.
  • Business succession planning combined with the guarantees of life insurance can provide you with peace of mind.
  • Surviving business owners receive a stepped-up tax basis when purchasing ownership shares from the deceased owner’s estate in a cross purchase arrangement.

Additional Considerations

To ensure death benefits are received tax-free, the business in an entity purchase arrangement generally must obtain notice and consent from each insured employee prior to issuance of the policy.
In a closely-held corporation using an entity purchase strategy, the family attribution rules may produce unfavorable tax results for the deceased owner’s estate. Consult your tax advisor when considering this strategy.
When creditor protection is important, work with your attorney to determine whether a cross-purchase or entity-purchase arrangement is best.
Consider planning for additional triggering events, such as disability, bankruptcy, divorce or loss of a professional license.

Keith Conley, CFP® is an independent financial advisor in Costa Mesa, CA. His expertise includes financial planning for high net-worth families and business owners. As a CERTIFIED FINANCIAL PLANNER®, Keith recognizes that financial planning means many different things, and believes that a holistic approach is optimal when making a plan to reach client objectives. He can be reached at 949-438-0397 or

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