Business Buy-Sell Agreement Funding
If your business partner died, where would the money come from to buy their share? A buy-sell agreement can set the terms of an ownership transfer. Life insurance may help fund the purchase after a covered death, so the remaining owners and the deceased owner’s family have a clearer path forward.
Talk with Anil Khanchandani, CLTC®, about the insurance funding. Your attorney prepares the agreement and your CPA reviews the tax implications.
Who should consider a funding review?
- Co-owners of a professional practice: partners want a plan for buying a deceased partner’s interest.
- Family-owned companies: working owners and heirs need clarity about who will own the business and how a purchase could be funded.
- Partners in a trade or service business: much of the business value is tied up in operations rather than available cash.
- Owners with an existing agreement: business value, ownership or insurance may have changed since it was signed.
A sole owner with an identified successor may also need a tailored arrangement. The right approach depends on the business and professional review.
An agreement and a funding plan work together
The agreement answers who buys, who sells, what triggers the transfer and how the price is determined. The funding plan addresses where the money may come from.
Illustrative situation: Two owners run a successful service business, but most of its value is tied up in equipment and ongoing work. If one died, the survivor might need funds to purchase the ownership interest from the family while keeping the business operating.
Properly coordinated life insurance may help fund that covered death-related purchase. It does not create the agreement, guarantee a full buyout or eliminate legal and tax issues. This is an example, not an actual client result.
When the owners buy: cross-purchase
In a typical cross-purchase arrangement, owners purchase life insurance on one another. Applicable proceeds go to the surviving policy-owning owners to help purchase the deceased owner’s interest under the agreement.
Each policy’s ownership, beneficiary and coverage amount must fit the arrangement. More owners can mean more policies and administration.
When the business buys: entity-purchase
The business typically owns the policies, pays premiums and receives applicable proceeds to help purchase the deceased owner’s interest.
Fewer policies do not automatically make this the better choice. Ask your attorney and CPA to review the arrangement, including how business-owned insurance proceeds can affect business valuation and estate taxes. Policy ownership and tax outcomes require individual review.
Three steps to a more useful review
- Gather the basics. List owners and ownership percentages, business structure, current valuation, existing agreement and relevant life insurance.
- Check the legal and funding fit. Your attorney and CPA review the agreement, valuation method, tax consequences and applicable notice, consent and reporting requirements. Anil explains available insurance, underwriting, premiums and coverage limitations.
- Keep it current. Revisit the agreement and coverage as business value, owners or goals change.
No agreement yet? You can still start the conversation and coordinate next steps with your attorney. A life insurance death benefit does not automatically fund retirement, disability, divorce or a voluntary exit; those events need separate funding arrangements.
Related: key person life insurance addresses a different need. Explore business insurance topics.
Start with one question: is your agreement funded?
Book a business insurance conversation with Anil Khanchandani, CLTC®. Bring your questions and, if available, the date of your agreement and current coverage details. Discuss the funding need and practical next steps without an obligation to buy.
Anil is a licensed life and health insurance producer offering options in states where he is licensed and appointed. He receives commissions from insurance carriers and charges no consultation or service fees. He does not draft agreements or provide legal, tax or business valuation advice.
An inquiry does not bind coverage. Coverage is subject to underwriting, policy terms, limitations and exclusions. Please do not email sensitive business documents or medical records.