Posted 06 Aug 2007
In a couple of previous posts, I discussed the value of buy-sell agreements for businesses with 2 or more owners and also one of the two major types of buy-sell agreements, the cross-purchase plan. This post is dedicated to the other main variation of the buy-sell agreement, the stock redemption plan.
Under a stock redemption plan, the corporation redeems the shares of the withdrawing stockholder. Retirement, death and disability tend to be the three most common withdrawal events found in buy-sell agreements, but corporations are not limited to those three and are free to mix and match as they see fit.
To fund the redemption (pay the withdrawing shareholder), the corporation typically uses the proceeds or funds it owns as both owner and beneficiary of a life policy insuring each stockholder. Thus, the corporation purchases one policy for each shareholder under a stock redemption plan, instead of each shareholder purchasing an insurance policy on each other (the cross-purchase plan).
Thus, stock redemption plans are easier to administer than cross-purchase plans because stock redemption plans require only one policy type per shareholder. Furthermore, the potential for unequal insurance costs due to individual health and age are evenly asorbed by the company.
All things equal, I have a slight preference to the stock redemption plan rather than the cross-purchase merely based on the ease of company administration. But as you probably already know, your company’s situation is never “all things equal” and you need to balance many factors to come up with the optimal solution.