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Entity-Purchase Agreement

What is ‘Entity-Purchase Concordat’

An entity-purchase agreement is a type of business succession plan used by suites that have more than one owner. The plan involves drink the company take out an insurance policy on the lives of owners in the amount suited to each owner’s interest. In the event of death, the amount collected by the guests from the insurance, which is equal to the deceased owners stake, is hardened to pay the deceased’s estate for its share of the business.

BREAKING DOWN ‘Entity-Purchase Bargain’

The advantage of an entity-purchase agreement-based succession plan is that the owners distinguish their respective stakes in the company will be paid out to their estates, and that the attendance will continue to be run by the other partners. Having this type of in a row plan, (which is paid for by the company) allows the owners to avoid any out-of-pocket expenses while also looking after their families in the circumstance of death. When the entity in question is a corporation, an entity-purchase agreement may be referred to as a founder redemption agreement. In such cases, the business itself will invade into an agreement with each owner to purchase a deceased proprietor’s business interest. The agreement requires that a deceased owner’s resources sell the business interest and that the business entity must buy the deceased proprietor’s business interest. The agreement also establishes the price to be paid either headquartered on a fixed amount or a formula.

Under this type of arrangement, the traffic entity buys a life insurance policy on the life of each possessor, based on the value of that owner’s ownership interest. In successful affairs, additional insurance would be purchased as the value of the business continued to escalation in value.

Advantages of an Entity-Purchase Agreement

  • Creates a market and establishes a even-handed price for the business interest

  • Provides the funds to make the purchase

  • Circumvents a forced sale of assets

  • Can provide liquidity to the estate of the deceased/lie down business owner

  • Creates a smooth transition for management and control of proprietorship

  • The deceased’s estate is assured prompt and full payment

  • The number of regulations that need to initially be purchased is limited to one policy for each proprietor

  • Because the business is paying the insurance premiums, there is a pro-rata interest of the costs between the owners according to their share in the business without solicitude as to age, smoker status or health ratings

  • Life insurance cash values are pretensioned as an asset on the business balance sheet

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