Partnerships Are Great—Until They’re Not

Running a business with a partner is like being in a marriage, except the stakes include payroll, profits, and that expensive espresso machine everyone agreed was “essential.” But what happens if one partner leaves, retires, or (gulp) passes away? That’s where buy-sell agreements and cross-purchase plans step in to save the day—and the business. Think of it as a prenup for your partnership, only with fewer arguments about who gets the dog.

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What’s a Cross-Purchase Plan? (Think of It Like Tag-Team Insurance)

A cross-purchase plan is a type of buy-sell agreement where business owners buy life insurance policies on each other. It ensures that if one owner exits due to death or disability, the remaining owners can purchase their share of the business, keeping everything running smoothly.

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Here’s how it works:

1. Each owner buys a life insurance policy on the others.

2. If one partner kicks the bucket (or decides to retire early to become a llama farmer), the surviving partners use the insurance payout to buy their stake.

3. The departing owner’s family or estate gets a nice payout, and the business stays intact without messy ownership disputes.

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Why this matters: no one wants to suddenly co-own their business with someone’s grieving aunt who has opinions about everything.

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How Does It Actually Work? (Spoiler: It’s Not Magic)

Imagine a two-person bakery: Claire and Sam are co-owners. They both agree their business is worth $1 million, with each owning a 50% share. To set up a cross-purchase plan:

1. Step 1: Life Insurance Policies

Claire buys a $500,000 policy on Sam, and Sam buys a $500,000 policy on Claire. They each pay the premiums (yes, out of pocket—sorry, no shortcuts).

2. Step 2: Triggering the Agreement

If Claire unexpectedly leaves the picture (RIP Claire), Sam receives the $500,000 payout.

3. Step 3: Buying the Share

Using the insurance money, Sam buys Claire’s half of the bakery from her estate. The business stays 100% in Sam’s hands, and Claire’s family gets fair compensation without having to roll up their sleeves and bake croissants.

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Why it works: It’s clean, it’s fair, and everyone avoids courtroom drama.

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The Pros: Why Cross-Purchase Plans Are a Game-Changer

• Keeps the Business Running Smoothly

Without a plan, a partner’s sudden departure can leave your business in chaos. A cross-purchase plan ensures continuity, which means fewer headaches for you and your team.

• Fair Value for Everyone

The insurance payout ensures the departing owner (or their family) gets the agreed-upon value, without disputes about how much the business is “actually” worth. No one likes those arguments.

• Tax Benefits (Because Who Doesn’t Love Saving on Taxes?)

Life insurance proceeds are generally tax-free, and since the policies are owned individually, they don’t count as business assets. Translation? No extra tax paperwork to ruin your weekend.

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The Cons: No Such Thing as a Free Lunch (or Policy)

• More Owners, More Policies

If your business has multiple partners, each one needs a policy on everyone else. For a five-person partnership, that’s 20 policies! (Time to call an insurance broker and your math-savvy cousin.)

• Premium Costs Add Up

Each partner is responsible for paying premiums, which can get pricey—especially if one of you has a “questionable” medical history (yes, we’re looking at you, Dave).

• Reassessment is Key

The value of your business will change over time. Unless you want to be underinsured, you’ll need to periodically reassess and adjust policy amounts.

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When Should You Use a Cross-Purchase Plan?

Cross-purchase plans work best for smaller businesses with only a few partners. If your company has more than three or four owners, this method can get unwieldy. In those cases, a stock-redemption plan might make more sense (but that’s a story for another day).

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A Quick Anecdote: The Coffee Shop That Almost Crumbled

Meet Julia and Marcus, owners of a thriving coffee shop in Santa Monica. When Marcus tragically passed away, his family wanted to sell his share to an investor with zero coffee experience (and an alarming love for instant cappuccinos). Thankfully, their cross-purchase plan kicked in. Julia used the life insurance payout to buy Marcus’s share, keeping the shop intact and instant cappuccino-free.

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Final Thoughts: Your Business Deserves a Plan

Cross-purchase plans might not be the most exciting part of running a business, but they’re among the smartest. They protect your hard work, honor your partnership, and ensure a smooth transition when the unexpected happens. Because let’s face it—losing your business partner is hard enough without losing your business too.

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