three assorted U.S. dollar banknotes



In addition to paper currency and coin, the definition of cash includes demand deposit accounts, such as checking accounts, and electronic methods for transfers of cash value such as wire transfers and direct deposit. There are several ways to set aside cash for the specific purpose of funding your buy-sell agreement with a cash payment.

Savings Tool



Cash reserves

Savings accounts, mutual funds, or any

liquid investment

Amount may be insufficient. Uncertain timing of purchase

Sinking fund

Special reserve account requiring periodic deposits

Amount may be insufficient. Uncertain timing of purchase

Expected future earnings of the company

Past strong earnings expected to continue

and be available for future sale

Earnings trend may not continue as expected. Uncertain timing of purchase

When Can It Be Used?

You Believe the Buyer Will Have Access to Cash When Needed

If the buyer has large amounts of cash held in savings accounts, mutual funds, or other accessible sources, cash may be a suitable funding method for the buy-sell agreement.


You (Or Your Estate) Get All the Money At Once

With lump-sum cash payment funding, you (or your estate) would receive the sales price in one payment. This provides convenience and buying power.

Very Simple Method

The use of cash for funding is very simple. When the time comes to make the sale, the buyer hands you or the executor of your estate a check for the full value of your business interest.


Possibility You or Your Estate Might Not Get the Cash Due to Uncertain Timing of the Sale

Your biggest risk as the seller under a buy-sell agreement funded with cash is that you may not get paid. A major factor for this risk is the uncertain timing of the purchase. Even if the buyer has sufficient cash when the buy-sell agreement is executed, there can really be no guarantee that the cash will still be available at the time of the triggering event, due to poor planning, unforeseen circumstances, or the unfortunate timing of a "premature" death.

Tip: The best protection against this possibility may be to periodically evaluate the buyer's financial condition in relation to the value of your interest.

Possibility You or Your Estate Might Not Get Paid If the Business Is the Buyer and Is Unable to Reserve Cash for Purchase

If the business is the buyer, cash may not be available when it is time to make the purchase. Changes in the business or the economy could reduce the company's ability to generate cash for reserves. Even worse, it could mean that reserves might be used instead for expansion or to keep the business running. In addition, a company's ability to hold large amounts of cash is restricted by:

  • Penalty for excess accumulations of cash--there are limits on the amounts of cash surpluses a corporation can accumulate without facing penalties in the form of the accumulated earnings tax.
  • State corporate laws--many state laws dictate that corporations must maintain minimum capital requirements, and that purchases of the business's own shares can come only from surplus funds. As noted, the accumulation of excess surplus funds is subject to penalties and tax. The lack of surplus funds could cause delays in the redemption of your interest.

Cash Reserves Not Protected from Outside Creditors

Cash reserves set aside for the future purchase of your business interest under the buy-sell agreement are subject to the claims of creditors. There may be enough money reserved now, but the funds could be reduced or eliminated as a result of creditor claims before the purchase under the buy-sell agreement occurs.

Tip: To reduce the amount of cash needed at the time of purchase, cash funding could be used in combination with other funding methods such as borrowings, installment payments, or insurance.

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How to Do It

Things to Do Now

Think About How Much Risk You Are Willing To Accept

If you are very confident that your buyer will have the cash to pay you or your estate when it is time to sell your business interest, cash as a funding method may be appropriate for your buy-sell agreement. However, if you would like more certainty that money for the sale will be both available and accessible, you may want to look at alternative methods such as buyer borrowings, installment payments, stock redemption, sale-leaseback, appreciated property bailout, or insurance.

Specify Cash as the Funding Method in the Terms of the Agreement

Make sure that the agreement specifies that cash will be the payment method used. Include a time frame for the completion of the sale.

Things to Do Later

Periodically Review the Agreement

You and your buy-sell participants should review the agreement on a regular basis, especially if the terms specify an annual valuation of the business. You should review the pricing method and make sure that increases in the value of the business are met with increases in the cash available to be used in the purchase.

Tip: If it appears that the value of the business is increasing to levels that might exceed the availability of cash, you might consider adopting funding methods to be used in conjunction with, or in place of, cash funding.

Check Up on Your Buyer

As part of the funding arrangement, you should routinely verify that the buyer is still in a position to pay cash. If the time comes when a cash payment is not possible, other funding can be arranged. An ongoing review can avoid an unpleasant surprise later.

Tax Considerations

Income Tax

Income Tax Impact on Seller (Or Estate)

The choice of cash as opposed to another funding method will not affect the income tax of the seller (or estate). However, the specific buy-sell agreement transaction may result in income tax consequences. Refer to the specific buy-sell agreement discussions for more information. It should be noted that the funding method used may have an impact on capital gains tax treatment. If the seller receives a lump-sum cash payment, the sale is subject to capital gains tax in the year of the sale. Use of a private annuity or installment sale may allow the capital gain to be spread out over the payment period.

Purchase of Your Interest Generally Not Tax-Deductible Expense for the Buyer

Whether the buyer of your business interest is the company itself (stock redemption) or an individual or group of individuals, it is not an income tax-deductible expense. When cash is distributed in exchange for the stock, the buyer recognizes no gain or loss on the transaction. When the business buys your interest, shares must be purchased from surplus funds. Because the purchase of shares is not tax deductible, earnings and profits of the business are generally reduced by the amount paid for the shares. It is important to note that although the transaction itself doesn't have a current income tax impact for the buyer, it establishes the taxable basis of the interest for future taxable events if the buyer is other than the company.

Source of Cash Used For Purchase May Have Tax Consequences for the Buyer

The source of the cash used by the buyer may have tax consequences related to it. For example, if stocks or mutual fund shares were liquidated to provide cash for the purchase of your interest, such a transaction may have its own tax effects on the buyer in the form of capital gains or losses.

Gift and Estate Tax

Amount Estate Receives from Sale of Business Interest Sets Estate Tax Value

When your estate sells your business interest for cash under a buy-sell agreement, the amount received from the sale usually sets the value of the business interest that is included in the gross value of your estate.

Caution: If the price received is determined to be less than the fair market value (FMV), the estate will also be required to include the difference between the amount received from the sale and the FMV determined by the IRS in the gross value of the estate. This means it is possible that the estate could be required to pay tax on value it did not (and never will) receive.

Questions & Answers

Is There Any Risk to Using Buy-Sell Funding Methods Other Than Insurance?

The biggest risk is that you (or your estate) won't receive your money when you are ready to sell your business interest. Your buyer may have neglected to set aside the cash or is unable to get a loan when it is needed. Or maybe your buyer did set aside the cash at one point and then needed it for some other purpose. If the business entity itself is your buyer, it may not have been able to set aside cash due to internal cash flow constraints or the possible imposition of the accumulated earnings tax.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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