Cross-Purchase Agreement

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DEFINITION of 'Cross-Purchase Agreement'

A document that allows a company's partners or other shareholders to purchase the interest or shares of a partner who is deceased, incapacitated or retiring. A cross-purchase agreement is used in business continuation planning. The document outlines how the shares can be divided or purchased by the remaining partners, such as a proportional distribution according to each partner's stake in the company.

INVESTOPEDIA EXPLAINS 'Cross-Purchase Agreement'

Because a cross-purchase agreement may result in shares becoming unexpectedly available (e.g. in the event of a partner's death), a partner will likely take out life insurance policies on the other partners and list himself as the beneficiary. If one of the partners dies, the funds from the life insurance policy can be used to buy the deceased's interest. Some cross-purchase agreements use a dollar amount to calculate the buyout price, while others use a formula.

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