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Cross Purchasing Agreement

A cross-purchase buy-sell agreement is a written and binding agreement wherein each business partner or shareholder individually agrees to purchase the interest of a partner/owner if one of the conditions that triggers the agreement occurs. Triggering events generally include the death, disability or retirement of a business owner or otherwise sale of a shareholder’s interest. The agreement outlines the terms of the sale and establishes a formula for determining the actual sales price of the stock based on the company’s valuation. It also obligates the remaining business owners to buy the departing owner’s shares of the company based on each owner’s individual percentage of interest outlined in the agreement. As part of the agreement, the departing shareholder, or her heirs, is also obligated to sell her interest in the company. With a cross-purchase plan, the company is not a party to the agreement.

Using life insurance to fund a cross-purchase plan, each business owner purchases a policy on the life of each of the other owners in an amount equaling their share of the purchase price of the insured owner’s interest. Each business owner is the policy owner and beneficiary of each of the policies on the lives of the other owners. In the event an owner dies, the remaining business owner’s receive the proceeds of the life insurance policies and use these proceeds to purchase the deceased owner’s business interest at a previously agreed upon price. When a deceased owner’s interest is purchased, the surviving owners generally receive a “step up” in the cost basis of their business interest while the former owner’s estate receives instant liquidity at a fair market value for their business interest.