A buy-sell agreement will have no practical benefit unless the purchaser can finance the purchase price. The purchase price can be paid in a number of ways. Existing assets of the purchaser may be used, although this may cause a financial strain on the purchaser, resulting in the liquidation of assets at an inopportune time. The funds can be borrowed if the purchaser has good credit and is capable of paying the interest incurred. Provision can also be made for installment payments of the purchase price, but this will require periodic outlays on the part of the purchaser.
Life insurance is often an ideal method of funding a buy-sell agreement.
Premiums are relatively inexpensive and cash outlays are predictable. The cost of the life insurance premiums will not adversely affect the working capital or credit of the purchaser, and it is easy to administer. The use of a buy-sell agreement funded by life insurance allows the heirs of the deceased shareholder to receive cash in exchange for stock. If properly drafted, the agreement will provide for an immediate purchase of the decedent's interest at a reasonable price. The heirs will benefit because the decedent's estate will have an infusion of cash to pay estate and inheritance taxes as well as administration expenses.