What is a Buy-Sell Agreement?
A Buy-Sell Agreement is a contract between company owners in which each owner agrees that upon separation from the business or death, their shares will be sold to the remaining owner at a set price and that each owner commits to buying the shares of their departing co-owner.
There are 3 types of Buy-Sell Agreements.
- Cross-Purchase Agreement: allows the remaining co-owner to purchase the interest of the departing owner.
- The Entity or Redemption Agreement: Requires the business itself to purchase the interest of the departing owner.
- The Hybrid Agreement: This is a cross between the previous two, requiring the remaining owners and businesses to purchase the interest of the departing owner. The surviving owner has the option to buy the departing owner’s interest, and the business would be obligated to do so if he chooses not to.
Liquidity To Fund the Buy-Sell Agreement:
A Buy-Sell Agreement is often secured with Life Insurance on each partner’s life. This way, when a death occurs, the benefits immediately kick in, and the company or partner receives the death benefits from the policy.