Methods of Funding a Buy & Sale Agreement It has been said many times, "Every problem has a price tag". This price tag will vary depending on when and how the costs are paid. But it is a fact-they will be paid, one way or the other. The real question should be what is the least expensive method of paying these expected costs? Death invariably creates a money problem. Death of a business owner creates a need for transferring the business to a new manager(s). In order to do this a sale of the business is often the best solution. A sale of the business for cash can solve several likely issues: Provide cash to the deceased owners family for income or to pay debts or other cash needs This removes the family members who are not involved with the business from the business Allows transfer of the business ownership to the people that will be running the business whether it is a family member or a key person in the business or another business owner or partner. Stabilizes the future of the business This cash can only come from three sources: EXISTING CAPITAL - The cash and liquid assets that have been accumulated with dollars saved AFTER paying income taxes. It should be considered, though, that for every $l.00 accumulated in the estate, it was necessary to earn anywhere from $l.50 to $2.00 to hold on to that dollar. And when existing capital is used to pay the transfer costs, you are taking away not only the principal from your business, but the earnings that this principal would have created. For example, a sum of $l00,000 compounded at 6% net AFTER tax interest for 20 years will grow to $321,000. And the cash is gone and unavailable for other uses of the business. BORROWED CAPITAL / INSTALLMENT PLAN /CASH FLOW - It may be possible for the business to borrow the needed capital, but principal plus interest must be repaid with after tax dollars. This the most expensive method.             For example, to borrow $l00,000 for l0 years at 12% would require an annual installment payback rate of $17,220. In l0 years this would total $172,200. This assumes that the money can be borrowed in the first place and that the business will be profitable enough to pay back this principal and interest to the lender in addition to the normal operating expenses. The business just lost a key person. Is that the time to being going into debt? A bank may not be interested in any kind of loan much less money to buy out stock of a dead owner. If the money can be borrowed by the business, it could tie up future credit that may be needed for business needs. After all, a person very key to the business has died. The business may need its credit resources just to survive. An installment plan can be established with the deceased owner's family. However, that is not the best situation for the family to be in or the business. The family is dependent on the success of the business for income. Minority stockholders can be very meddlesome. Incurring any additional debt obligations at the loss of a key person is rarely a good idea. Cash flow will be affected and so is profitability. That is why few businesses survive the death of an owner. CREATED CAPITAL - The most inexpensive method. Create tax-free capital using life insurance proceeds payable at death. The cost of the insurance is less than the need. And the funding is paid for while the owner(s) are living. Each $1.00 of liability can be purchased for pennies on the dollar and there is no principal to repay. The cash needed is guaranteed to be available whenever it is needed, even from the first day. The proceeds are tax-free to the beneficiary. The cash needed is created by the event that caused the need, the death of an owner.  Any kind of life insurance can be used. Term life is very inexpensive at the beginning but is not the most cost effective long term product solution. Some type of cash value life insurance will yield the best long term cost. However, for a young business with cash flow issues, term life is an excellent choice. Funding a buy and sale agreement with adequate life insurance is a good business decision. Without proper funding, what good is a buy and sale agreement? Regardless of the values and agreements, if it cannot be carried out, the agreement is worth only the paper it is written on.