When an agreed value is used, provide a default valuation in case the parties can't meet at regular intervals to review the agreed-on value. Usually that default value will be the prior value, adjusted for financial results for that time period. A drawback to this method is that when parties are related, the IRS may not honor the established value. If the buy-sell agreement provides for the payment of a buyout caused by a triggering event, be certain that the party handling the buyout can make that payment. Lump sum payments are sometimes required, especially on an owner's death.
Life insurance is the most common form of funding a buyout of a deceased owner.
If a cross purchase is contemplated with more than two shareholders, several insurance policies on each person will be necessary, because each owner must own a policy on one another's life. In a redemption agreement, you need fewer policies, because the business entity requires only one policy on each owner's life. Using a family partnership or trustee buyout as an alternative can reduce the number of policies needed and accomplish a buyout without the AMT risk. When a buyout occurs on an event other than a death, providing for installment payments with interest over a period of time is advisable. This allows the buyer to secure financing or to fund the buyout through company earnings.