BUY-SELL AGREEMENT OVERVIEW

A business purchase agreement is an arrangement for the orderly disposition of a business interest in the event of the owner’s death, disability, retirement or upon withdrawal from the business at some earlier time. Business purchase agreements may take a number of forms:

1. An agreement between the business itself and the individual owners (a stock redemption agreement).
2. An agreement between the individual owners (a cross purchase or “criss-cross” agreement).
3. An agreement between the individual owners and key person, family member or outside individual (a “third party” business buy-out agreement).
4. A combination of the foregoing.

The most common types of business purchase agreements are the stock redemption plan (often called a stock retirement plan) and the cross-purchase plan. The distinguishing feature of the redemption agreement is that the corporation itself agrees to purchase (redeem) the stock of the withdrawing or deceased stockholder.

In a cross-purchase plan, the individuals agree between or among themselves to purchase the interest of a withdrawing or deceased stockholder.

MOTIVATIONS FOR AN AGREEMENT

Consider using a buy-sell agreement when any of the following exist or are available:

• A guaranteed market must be created for the sale of a business interest in the event of death, disability, or retirement
• When it is necessary or desirable to “peg” the value of the business for federal and state death tax purposes
• When a shareholder would be unable or unwilling to continue running the business with the family of a deceased co-owner
• If the business involves a high amount of financial risk for the family of a deceased shareholder and it is desirable to convert the business interest into cash at his or her death
• It is necessary or desirable to prevent all or part of the business from falling into the hands of “outsiders”

A written agreement is drawn stating the purchase price, terms and funding arrangements. The agreement obligates the retiring or disabled owner or owner’s estate to sell the business either:

• To the business itself
• To the surviving owner(s)

Occasionally, an agreement combines the two types of obligations and will give the individuals an option to purchase the stock but provide that if they fail to exercise the option, the corporation must purchase the stock.

The stock agreement specifies the event triggering the respective obligations. Generally, that event is the death, disability or retirement of the owner. Valuation should be according to book value, a formula value, or some agreed amount.

FUNDING THE PURCHASE

“Funding” pertains to how the promises under the agreement will be financed. Usually, in a redemption agreement, the business will purchase, own and be the beneficiary of life and disability income insurance on each person who owns an interest in the business.

In the case of a cross-purchase agreement, the prospective buyer (each business associate) purchases, owns and is beneficiary of a life and disability income insurance policy on his or her co-owners.