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Simple English definitions for legal terms
cross-purchase buy-sell agreement
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A quick definition of cross-purchase buy-sell agreement:
A cross-purchase buy-sell agreement is a plan where business partners agree to buy enough life insurance on each other to cover the cost of buying out a partner's share if they die or leave the business. This helps ensure that the business can continue without financial strain and that the departing partner's family receives fair compensation for their share of the business.
A more thorough explanation:
A cross-purchase buy-sell agreement is a type of partnership insurance plan. In this plan, each partner buys and maintains enough insurance on the life or lives of other partners. This is done to purchase a deceased or expelled partner's equity.
Let's say there are three partners in a business. They have a cross-purchase buy-sell agreement in place. Partner A buys insurance policies on the lives of Partner B and Partner C. Partner B buys insurance policies on the lives of Partner A and Partner C. Partner C buys insurance policies on the lives of Partner A and Partner B.
If one of the partners dies or is expelled from the business, the remaining partners use the insurance money to buy the deceased or expelled partner's equity. This ensures that the business can continue without any financial disruptions.
This type of agreement is common in small businesses where there are only a few partners. It provides a way to protect the business and the partners' investments in case of unexpected events.