What is an Entity Purchase Agreement?
An Entity Purchase Agreement is a type of buy-sell agreement in which the business itself agrees to buy back the ownership interest of a partner or shareholder in the event of death, disability, or retirement. This agreement ensures a smooth transition of ownership and helps maintain business stability. The company often uses life insurance policies on each owner to fund the buyout, making sure that funds are available when needed.
In this arrangement, the business is both the owner and beneficiary of the life insurance policies. When a triggering event occurs, such as the death of an owner, the business receives the insurance payout, which it uses to purchase the deceased owner’s shares. This method centralizes the buyout process and keeps ownership within the company, preventing external parties from acquiring a stake.
Entity Purchase Agreements are particularly useful for businesses with multiple owners who want to secure a clear succession plan. This approach ensures that the remaining owners are not financially burdened by buying out a departing owner’s share, as the business itself handles the transaction using pre-arranged funds.