What is a Cross Purchase Agreement?
A Cross Purchase Agreement is a legal arrangement typically used by co-owners of a business to ensure the smooth transfer of ownership shares if one owner dies, becomes disabled, or exits the business. Under this agreement, the remaining owners commit to purchasing the departing owner’s shares, often using life insurance policies to fund the buyout. Each owner buys a life insurance policy on the other owners, ensuring that the funds are available to acquire the deceased or departing owner’s interest.
This agreement helps avoid disputes and financial instability by clearly outlining the process for transferring ownership. For example, in a business with three partners, each partner holds a life insurance policy on the other two. If one partner passes away, the insurance payout provides the remaining partners with the necessary funds to buy out the deceased partner’s share, allowing the business to continue without financial disruption.
A Cross Purchase Agreement is beneficial because it provides a fair and predetermined method for business succession, helps maintain stability, and ensures that ownership remains within the remaining partners. It can also establish a clear valuation for the business, preventing conflicts and securing the future of the enterprise.