About Cross-Purchase Agreements and Buy-Sell Agreements
A cross-purchase agreement is a type of business continuation plan best suited for a business with few business owners. The cross-purchase arrangement requires departing business owners or the estates of decedent business owners to sell their interest in the business to the remaining business owners at an agreed upon price.
The agreement can apply to one or more of the existing business owners (i.e. it can apply only to those owners that choose to participate). A properly structured cross-purchase agreement allows for continuity of management, a course of income for the business owner and his or her family, and a clear direction for future ownership.
How Does It Work?
The participating business owners enter into a cross-purchase agreement. The agreement will require the participating business owners to purchase other participating business owners' interests in the business for an agreed upon or determinable price upon the occurrence of a triggering evet (death, disability, or retirement). The participating business owners will purchase a cash value life insurance policy on each of the other participating business owners' lives in order to fund the purchase obligation.
Each participating business owner will pay the premiums and will be the beneficiary of the respective policies. At the first business owner's death or departure from the business the other participating business owners will use the life insurance death benefit proceeds or the available cash surrender value to purchase the decedent or departing business owner's interest.