View source for Definition:Entity-purchase agreement

📋 '''Entity-purchase agreement''' is a type of [[Definition:Buy-sell agreement | buy-sell agreement]] in which the business entity itself — rather than individual owners — commits to purchasing the ownership interest of a departing, deceased, or disabled partner or shareholder. In the insurance context, these agreements are almost always funded by [[Definition:Life insurance | life insurance]] or [[Definition:Disability insurance | disability insurance]] policies that the entity owns on the lives of its owners, ensuring that cash is available at the moment a triggering event occurs. The structure is particularly common among closely held insurance agencies, [[Definition:Managing general agent (MGA) | MGAs]], and brokerage firms, where the sudden loss of a principal could destabilize client relationships and [[Definition:Carrier | carrier]] appointments.

⚙️ Under a typical arrangement, the business purchases and pays premiums on a life insurance policy covering each owner, with the entity named as both owner and [[Definition:Beneficiary | beneficiary]]. When a triggering event — most often death — occurs, the insurance proceeds flow directly to the entity, which uses them to buy back the deceased owner's shares at a price determined by a pre-agreed valuation formula or appraisal mechanism embedded in the agreement. Because the entity is the purchaser, the remaining owners' proportional stakes increase automatically without requiring them to fund the transaction out of pocket. Tax treatment varies by jurisdiction and corporate structure; in the United States, for instance, the [[Definition:Internal Revenue Service (IRS) | IRS]] subjects C-corporations to different rules than S-corporations or partnerships, and missteps can trigger unexpected [[Definition:Capital gains tax | capital gains]] or [[Definition:Alternative minimum tax (AMT) | alternative minimum tax]] consequences. Advisors in the UK, Australia, and other markets structure functionally similar agreements under local company law, though the insurance products and tax frameworks differ.

🔑 For insurance distributors and underwriting firms, a well-funded entity-purchase agreement is more than a succession planning tool — it is a safeguard for operational continuity. [[Definition:Insurance carrier | Carriers]] that grant [[Definition:Binding authority agreement | binding authority]] to an agency often scrutinize the firm's key-person risk and succession readiness before extending or renewing appointments. An unfunded or poorly structured agreement can leave surviving owners scrambling for capital, potentially forcing a fire sale or inviting unwanted outside investors. Conversely, when the agreement is backed by adequate [[Definition:Key person insurance | key person]] coverage and reviewed periodically against updated valuations, it signals financial discipline to carriers, [[Definition:Reinsurer | reinsurers]], and prospective acquirers alike — a factor that matters increasingly as [[Definition:Mergers and acquisitions (M&A) | M&A]] activity in the insurance distribution sector intensifies globally.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Buy-sell agreement]]
* [[Definition:Cross-purchase agreement]]
* [[Definition:Key person insurance]]
* [[Definition:Business continuation planning]]
* [[Definition:Life insurance]]
* [[Definition:Succession planning]]
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