Business Succession Planning

(An Often-Overlooked Aspect of Estate Planning)

Translating the 4th-Century ad Roman military writer [Flavius Vegetius Epitoma Rei Militaris iii. (Introd.)] qui desiderat pacem, praeparet bellum,“[H]e who desires peace must prepare for war.”

For small family owned businesses, Business Succession Planning, should be seen as a piece of a larger Estate Planning puzzle.  In order to understand Business Succession, we must first look at Estate Planning.

Often times a client will retain you or your law firm to “draft” a Will or Trust.  It is important for your client to understand that a Will or Trust is NOT an Estate Plan.  In this vane, a Buy-Sell Agreement is not a complete Business Succession Plan.

What is a Buy-Sell Agreement

A buy-sell agreement may be thought of as a sort of "premarital agreement" between business partners/shareholders. It is sometimes called a 'business will'. An insured buy-sell agreement (agreement funded with life insurance on the participating owner's lives) is often recommended by business succession specialists and financial planners to ensure the buy-sell arrangement is well-funded and also to guarantee there will be money when the buy-sell event is triggered.

Where do we find a Buy-Sell Agreement

A Buy-Sell Agreement can typically be found in a company’s Shareholder Agreement.

Basic types of Buy-Sell Agreements

There are two basic types of buy-sell agreements: Entity Redemption and Cross-Purchase.  Each type of agreement holds distinct advantages and disadvantages.

1. Entity Redemption - The business enters into an agreement to purchase the share of a shareholder upon a triggering event.  


  1. With more than 2 shareholders (and if funded by insurance) this plan is easier to manage;
  2. Equalization of payments for insurance since the business is paying;
  3. The cash value of any insurance policy held for purposes of funding the buy-sell agreement is an available business asset.


  1. Maybe unfavorable with regard to the basis of the surviving business owner’s shares should the survivor purchase the shares from the business (although exceptions may be present for S-Corps);
  2. Policy and cash value are subject to business creditors;
  3. No deduction for premiums of life insurance;
  4. Potential increase in value of entity upon death for tax purposes.

2. Cross Purchase - Individual Shareholders enter into an agreements to purchase the share of a shareholder upon a triggering event.


  1. Income Tax-free death benefit of life insurance;
  2. Insurance is not subject to business creditors;
  3. Basis increase for stock purchase;
  4. No ATM for corporation.


  1. Uses personal income to pay for insurance;
  2. Possible disproportionate premiums between shareholders;
  3. Company cannot record policies as assets;
  4. Administrative complexity.

For a more detailed description please feel free to contact our firm.

For more information, contact us here or call (631) 470-9753.