Accepting an unqualified heir as co-owner, on the other hand, will lead to inefficiency and eventually liquidation. Therefore, buying over the deceased owner's share becomes a common strategy practised by most businesses where one can take control of the business. Any business with more than one owner is likely to establish a formal ownership-transfer agreement that takes effect when one owner dies. Under this agreement, the decedent's heirs receive cash from the surviving owners in exchange for the decedent's ownership interest. This buy-sell agreement requires money to make it work.
Life insurance is the most common method of funding buy-sell agreements.
This is much the same as life insurance on the life of any individual with outstanding indebtedness. Here, the insured would be a key person in the business so that the debt would be liquidated at his or her untimely death. It is important to ensure that personal portfolio is separated from business assets and liabilities.