Buy-Sell Agreements: Cross-Purchase and Entity-Purchase Agreements

Buy-sell agreements are important in helping business owners value their business for purposes of the proper, planned disposition of a deceased or departing member’s interest. A Woburn business lawyer  can provide indispensable services in negotiating, drafting, and reviewing a buy-sell agreement.

The two primary types of buy-sell agreements are cross purchase agreements and entity purchase agreements. Although this discussion addresses a corporation and the shares of stock owned by its shareholders, the same principles apply to a partnership or limited liability company (an LLC). Our business lawyers have compiled the following information to better guide you through the process.

A cross-purchase Buy-Sell Agreement is a contract between the respective shareholders that provides for the surviving owners to personally purchase the interest of the departed owner. An entity-purchase agreement is a contract between the corporation and each shareholder that provides for the departed owner’s interest to be purchased (redeemed) by the business itself, the corporation. It is therefore also known as a stock-repurchase or a stock-redemption agreement.

As much flexibility can be built into a Buy-Sell Agreement as the parties can design and agree to. For instance, the shareholders might not want to be saddled with the sudden obligation to buy out a shareholder on his or her unexpected retirement. In such cases, the agreement could provide for an option to purchase the departing shareholder’s shares, whereas on the same shareholder’s death the parties might agree that a mandatory purchase is desirable.

Often, of course, the obligation or opportunity to buy out a departing shareholder is a daunting financial challenge. Disability buy-out or life insurance can provide a source to fund the purchase of a departed shareholder’s shares. Our business lawyers can better explain the process so that it is easy to understand and correlate to your specific situation.

In a cross-purchase transaction each shareholder purchases an insurance policy on the life of each other shareholder. However, with multiple shareholders this can become unwieldy and expensive. For example, if there are 5 shareholders there would be 20 policies (each of the 5 purchases policies on the other 4 shareholders).

With an entity-purchase agreement, the business entity purchases a policy on each shareholder. This arrangement is more manageable for multiple shareholders.

Business owners need the skill of a qualified business lawyer to guide them through the maze of contractual provisions required for a buy-sell agreement. The end goal is to provide an affordable method of allowing the surviving owners to continue their business uninterrupted.

Don’t delay implementing key business planning; call a business lawyer  at Ionson Law today at (781) 674-2562.

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