Life Insurance Funding of Buy-Sell Agreements: Basic Considerations

A crucial issue for a closely held business that wishes to buy out one of its principal owners is whether it will have the funds to do so. Because so few businesses have sufficient cash or other resources to fund a buyout, the seller must usually accept an installment payout and continue to share the risks of the future profitability of the business unless the business has provided for a fund to buy out the major owner says California Business Lawyer Steven Peck.

There are essentially three methods for funding a buyout:

1. Borrowing;
2. Setting up a sinking fund or reserve;
3. Acquiring insurance.

If a business has the borrowing capacity or available cash to fund a buy-sell agreement, the cost of life insurance should be compared with the cost of borrowing money or using the company’s own funds.

To talk to an experienced California Business Attorney contact Steven Peck’s Premier Legal toll free at 1-866-999-9085.