Cross purchase agreements are a fantastic way of continuing your business. Let me explain how this can work. Let's say you have three people who are co-owners of a business.
The proper steps to take
First and foremost, we would have the business evaluated. And if the business were to be valued at $300,000, each partner would have an equal share. Each partner will then buy and own a policy on the life of the other two.
So you have three partners. Partner A buys insurance on the life of B and C. That person is the owner of the policy and he is the beneficiary of the policy. Number two buys a policy on C and A. I'm sure you get the rhythm of what I'm talking about.
Of the three partners, each buys a policy on the other two, and they become the owner and the beneficiary. They get insurance on the two other partners' lives.
What happens if one of them dies?
They own a policy and they're the beneficiaries of the policy, so when A dies, then the insurance policy will be paid to the surviving partners, as long as the premiums are kept up. Then they have the money to buy out the share.
So if the person's share was $50,000, and they have a $100,000 policy, they could take that $50,000 and pay it to the person who would be entitled to that decedent's portion of the business. So that's an easy and affordable way of financing a buyout if one of the partners dies.
The benefits of the cross purchase agreement
The business continues because you have the money to buy out the late co-owner's portion. That way, you don't have to inherit someone who knows nothing about the business, maybe a son or a wife of the decedent. You don't have to worry about any family member becoming a part of the business because you can buy them out with the insurance proceeds.
You could also have enough money to put some of it back into the business. The numbers basically will determine whether or not it is economically feasible for this cross purchase agreement to be implemented. But it is one that is very popular, very simple, and it basically gets the job done and allows the continuity of the business.