Types of Buy-Sell Agreements

A buy-sell agreement is a legally binding document that stipulates what will happen to a business when a business owner or partner becomes disabled, dies, retires or decides to sell his or her interest in the company. Buy-sell planning is an extremely important part of long term business continuation planning. The common types of buy-sell plans include the stock redemption agreement or entity plan, the cross purchase buy-sell agreement and the wait-and-see buy-sell agreement.

Stock Redemption Plan or Entity Plan:

An agreement between the company (Entity) and the business owners or partners whereby the owners agree to sell their ownership interest back to the company if they become disabled or wish to retire. If there is a death of an owner, the owner’s estate is required to sell the deceased owner’s interest back to the company. For additional information, see What is a Stock Redemption Plan?

Cross-Purchase Agreement:

A written agreement among the company partners or stockholders to purchase each other’s shares at the disability, retirement or death of a business owner. For more details, see What is a Cross-Purchase Buy-Sell Agreement?

Wait-and-See Buy-Sell Agreement:

An agreement allowing the business owners to delay the selection of an entity plan or a cross-purchase buy-sell agreement until an actual death, disability, retirement or sale of a business interest. For specific details, What is a Wait-and-See Buy Sell-Agreement?

Which Type of Buy-Sell Plan is Best for My Company?

The questions below will help you identify the type of buy-sell agreement that may best fit your business.

  1. How many business owners does the company have?
  2. How old are the individuals that own the business?
  3. Is each of the owners insurable?
  4. What are the ownership interests of each owner?
  5. What is the value of the business?
  6. Is this a family owned company?
  7. What is the potential tax impact for each option?
  8. What are the estate planning implications for each option?

The answers to each of these questions will provide insight into which plan will suit your business. Consulting with your business attorney and CPA or tax adviser is the only way to assure you address all potential concerns and choose the proper plan structure¹.

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