What is a cross-purchase agreement?
Definition
A cross-purchase agreement is a type of buy-sell agreement in which each co-owner of a business agrees to purchase the ownership interest of a departing, deceased, or disabled co-owner directly from that owner or their estate, rather than having the business entity itself make the purchase.
Under this structure, each owner typically carries a life insurance policy on every other owner, with themselves named as beneficiary, so that insurance proceeds are available to fund the purchase when a trigger event occurs. The legal framework for these agreements is grounded in the business entity's operating agreement or shareholder agreement under North Carolina contract law.
A cross-purchase agreement is often contrasted with an entity-purchase (or stock redemption) agreement, where the business itself buys back the departing owner's interest. The right choice between structures depends on the number of owners, the tax basis implications, and how the purchase will be funded.
Key details
Structure: Each owner purchases directly from the departing owner, not through the company
Funding: Typically funded through individually owned life insurance policies; with three or more owners, the number of policies required equals N x (N-1), which increases complexity
Tax basis advantage: The purchasing owner receives a stepped-up cost basis in the acquired interest, which reduces capital gains exposure upon a future sale
Valuation: The agreement must specify a valuation method or formula; common approaches include fixed price, book value, or independent appraisal
Trigger events: Typically include death, disability, retirement, divorce, bankruptcy, or a voluntary sale to an outside party
According to IRS guidance on buy-sell agreements and North Carolina contract law principles, as of 2025.
Related pages
See the full guide: Business Succession Planning in Raleigh, NC
Deep dive: Buy-Sell Agreements in North Carolina: How They Work, Trigger Events, and Funding
Related reading: Business succession planning for Raleigh business owners
