A buy-sell agreement is a contract that sets out how a partner’s shares will be obtained by the remaining partners or owners of a firm in case of their death or departure. This is usually done to ensure that the business continues to operate smoothly and that the departing partner’s interests are bought out by the remaining partners. A buy-sell agreement does not need a funding mechanism to be valid. The entity and its owners may have sufficient resources to pay for any interests that may be bought pursuant to the terms of the agreement.
However, it is very common to fund the obligations to purchase interests upon the owners’ deaths with life insurance
There are several ways to fund a buy-sell agreement, including the creation of a sinking fund (holding back business profits ― creating an after-tax cash reserve ― to cover the cost of the buy-sell), agreeing to an installment sale (using existing company cash flow to make the installment payments), or borrowing (taking a loan to fund the buy-sell)
(1) Strategies for buy-sell agreements using insurance - Thompson Coburn. https://bing.com/search?q=buy+sell+agreement+funding. (2) Strategies for buy-sell agreements using insurance - Thompson Coburn. https://www.thompsoncoburn.com/insights/publications/item/2019-09-16/strategies-for-buy-sell-agreements-using-insurance. (3) What to Know About Funding a Buy-Sell Agreement. https://www.northwesternmutual.com/life-and-money/what-to-know-about-funding-a-buy-sell-agreement/.
(4) Funding a buy-sell agreement for a business | MassMutual. https://blog.massmutual.com/post/funding-buy-sell-agreement. (5) How to Fund a Buy-Sell Agreement - O'Flaherty Law. https://www.oflaherty-law.com/learn-about-law/how-to-fund-a-buy-sell-agreement-raising-capital-to-buy-out-another-owner. (6) Buy-Sell Agreement Definition, Types, Key Considerations - Investopedia. https://www.investopedia.com/terms/b/buy-and-sell-agreement.as