Cross-Purchase Agreements and Key Person Planning: Two Tools to Review Together

Understanding the Two Planning Tools

Cross-purchase agreements and key person planning are two different concepts, but they may work well together depending on your situation. A cross-purchase agreement is generally designed to outline what happens to an owner’s business interest if that owner leaves, becomes disabled, retires, or dies. Key person planning is designed to help a business respond if someone whose leadership, technical knowledge, or relationships are important to operations is no longer available.

What works for one business may not work for another. The right approach often depends on ownership structure, the number of owners, the company’s revenue model, and how much responsibility is concentrated in a few individuals.

How a Cross-Purchase Agreement Works

In a cross-purchase arrangement, the remaining owners may agree to purchase the departing owner’s interest. The agreement typically spells out:

• When a buyout may be triggered
• Who may have the right or obligation to purchase the interest
• How the business interest may be valued or valued under a formula
• How the transaction may be funded

Many businesses use life insurance or disability insurance as one option worth exploring to help fund the agreement, subject to policy terms and conditions. Coverage details, availability, and costs vary by state and carrier.

Because this arrangement involves ownership transfer and legal obligations, it is important to review the agreement carefully. Consult with a qualified legal advisor.

What Key Person Planning Is Designed to Address

Key person planning focuses on the value of an individual whose absence might affect the business in meaningful ways. That person may be an owner, but does not have to be. For example, a business may rely on:

• A founder with long-standing client relationships
• A technical specialist who understands core operations
• A leader who manages strategy, culture, or sales
• An employee with specialized institutional knowledge

Insurance used in key person planning is often intended to provide funds that may help with transition costs, recruiting, training, or maintaining stability during a difficult period. Depending on the structure, the business may own the policy and be the beneficiary. The exact treatment can vary based on plan design and applicable rules.

Where the Two Strategies Can Overlap

Some businesses review cross-purchase agreements and key person planning together because the same individual may serve both roles: owner and key contributor. In that case, a business may want to consider whether one planning tool is enough or whether a combination could be more appropriate.

For example:

• A two-owner company may use a cross-purchase agreement to address ownership transfer
• The same company may also identify one owner whose relationships or expertise would be difficult to replace quickly
• A business with multiple owners might use insurance for buyout funding while also reviewing whether the company itself needs separate protection for a key leader

The coordination question is often less about choosing a single “best” option and more about understanding how each tool supports a different business objective.

Important Tax and Legal Considerations

Because these arrangements can involve ownership, entity structure, and policy ownership, tax considerations may arise. Some structures may have tax advantages depending on your situation; consult a qualified tax advisor. Consult with a qualified tax professional regarding your specific situation.

Legal drafting is also important. A cross-purchase agreement may need to address valuation, triggering events, funding mechanics, and the timing of any transaction. Consult with a qualified legal advisor.

Questions Worth Reviewing With an Advisor

Before putting a plan in place, business owners may want to review questions such as:

• Who are the owners today, and does the ownership group expect changes?
• Which individual or individuals are most important to operations, client service, or revenue continuity?
• Would a buyout arrangement and key person planning address different needs?
• Should the business, the owners, or both own any insurance used in the structure?
• How might the plan change if ownership shifts in the future?
• Are there state-specific considerations that may affect available products or documentation?

These questions are often easier to answer when business, legal, tax, and insurance professionals coordinate their review.

Why Coordination May Matter

A cross-purchase agreement without funding may leave owners with a plan on paper but not necessarily a practical way to implement it. Key person planning without a broader continuity discussion may help in one area while leaving another area unaddressed. Reviewing both together may help a business create a more complete picture of how to respond to an ownership change or the loss of an important team member.

For many businesses, the most useful plan is the one that matches real-world operations, ownership goals, and the way the company actually functions.

This article is intended for educational purposes only and should not be considered as insurance, tax, or legal advice. Coverage options, availability, and costs vary by state, carrier, and individual circumstances. Please consult with a licensed insurance professional to discuss your specific needs.

If you would like a practical conversation about how these ideas may apply to your business, Integrity Advantage Group offers a complimentary 15-minute review with no cost and no obligation.