Share Purchase Agreements

When the kiss of death touches a business owner or they decide for themselves to sell the business, the first measure is to determine the dollar value of the business or their share of it. The value of the business can be determine by a certified public accountant (CPA), a chartered accountant, or by an agreement between the people involved. For companies that are publicly traded, the value of the owner’s interest will be based on the stock’s current market value. Calculate your Business Value
 

Life insurance can be used as a means to provide the funds to purchase an outgoing owner’s interest when a buy/sell agreement has been executed. After a value has been set for the business, life insurance can be purchased for each partner. In the case of a partner dying before selling his share, the insurance proceed can be used to buy out the deceased partner’s share of the business and pass on the shares equally to the other partners.
 

There are two different arrangements that are generally used. One is cross-purchase (or cross-ownership agreements) and entity-purchase (or self-ownership) agreements. Both of these arrangements can achieve the same means.
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There are two basic arrangements used. They are known as cross-purchase (or cross-ownership agreements and entity-purchase (or self-ownership) agreements. Although both ultimately serve the same purpose, they are used in different situations.
 
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The main objective of a cross purchase or buy/sell agreement is to provide a vehicle for the withdraw of a partner from a business without expensive legal proceedings. A Cross Purchase Agreement makes perfect business sense.

Upon the death of a business partner, two critical issues need to be resolved:

With a cross purchase agreement you have the perfect solution to these critical issues. Despite our efforts in other areas of managing our wealth, wealth succession is often over looked. The best thing for you as a business owner is that wealth succession control is affordable. A cross purchase insures your control and helps to maintain the value of your company in the event that your partner passes away and will insure that your dependants receive the appropriate value for your share in the business upon your death.
 
 
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In most cases cross purchase agreements are used to protect a jointly owned business. Though they can be used to protect two distinct businesses that are depend on each other for shared business or for materials. 

 

Tax specialist seem to be in agreement that the intricacy of stamp duty, capital gains tax and income tax lead to considering multiple possibilities. These options are best when they are “put and call”, which is the right to force another party to buy or sell should be available with each party to provide for your protection. The reality is that you don’t know at this time who will need who to sell. You may need to force the estate of your partner to sell. 

 

 
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Ultimately which life insurance is your choice but there are several mitigating factors that you should consider:

Upon deciding on the policy that meets you individual needs (partners may make different decisions), you need to start think about who will hold the policy. It is likely that many factors will influence your decision. The most common scenario is for each partner to own a policy on the life of the other partners. Additionally, you might consider a group policy on various partners that is held jointly by the partners. While reading about these policies they seem straightforward but often they fail to allow a partner to maintain an interest in his policy in the event that he leaves the partnership. This is important in the event that the policy has a cash value or the partner is uninsurable or can only be insured at an increased rate. Additionally there are circumstances in which a partner may want their policy in the hands of their spouse.

 

Cross purchase agreements are made to allow each partner to buy and own a policy on the other partners in the business. Partners function as both owner and beneficiary on the same policy, meaning that each partner is insured. In the event that one partner dies, the value of the policy on the deceased is paid out amongst the partners that are left. The proceeds paid out to the surviving partners will in turn be used to buy the share of the deceased partner’s business at a price previously determined.
 
If no buy/sell agreement is in place, cross-ownership is your best bet. Though without a legal agreement, the living partners don’t have a means of forcing the living partner’s estate to sell. Additionally the estate cannot force them to buy. Additionally, if they decide to sell the business and assign their insurance policies to one another, they will be forced to pay capital gains tax which is normally payable on insurance payments. One problem that arises with a cross-ownership agreement is that when there are many partners 5 or more, it isn’t feasible for each partner to have a separate policy on the others. Another problem is that there may be a substantial difference in regards to the cost of underwriting which result is substantial difference in the cost of policies. The cost of policies greatly differ when one partner is significantly younger than the other. The result will be a huge disparity between the costs of the policies.

 

In this event, an entity-purchase agreement may better suit your insurance needs. Read More
 

A simpler type of insurance is an entity purchase which is also called a self-ownership insurance arrangement. This type of agreement differs due to the fact that the business purchases a single policy on each partner and becomes the policy owner and beneficiary. In the event of the death of a partner or owner the proceeds will be used by the business to purchase the deceased person’s share of the business. The fees involved in purchasing this policy are tax deductible and the business absorbs the cost of the underwriting. An entity purchase agreement only requires the purchase of three policies.

 

Self-ownership is simple and can help your business to avoid the pitfalls of a CGT. Though it only works with a legal buy/sell agreement in place.
 
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