Cross-Purchase Agreement

Cross-Purchase Agreement

A Cross-Purchase Agreement is a legal arrangement among business partners or co-owners that facilitates the transfer of ownership interests in the event of a partner’s departure, whether due to retirement, death, disability, or other circumstances. This type of agreement outlines how the remaining partners will purchase the shares or interests of the exiting partner, ensuring a smooth transition and maintaining the control of the business within the existing partners.

In a typical Cross-Purchase Agreement, each partner agrees to buy a predetermined portion of the departing partner’s ownership interest. This arrangement is often funded through life insurance policies, where each partner owns a policy on the life of the others. Upon the death of a partner, the proceeds from the life insurance policy are used to buy the deceased partner’s shares, thus ensuring that the business remains within the control of the surviving partners.

For example, consider a small business with three partners: Alice, Bob, and Carol. They enter into a Cross-Purchase Agreement where each partner agrees to buy the shares of the others in case one of them leaves the business. If Alice passes away, Bob and Carol would use the life insurance payout from the policy they each hold on Alice to purchase her shares, rather than the shares being inherited by her estate or another third party. This helps prevent unwanted outsiders from entering the business and maintains the original partnership dynamic.

Overall, a Cross-Purchase Agreement is a crucial tool for business succession planning, ensuring that ownership transitions are handled smoothly and in accordance with the partners’ wishes.