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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:
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
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:
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.
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Send mail to sbordelon@fimadvisors.com with questions or comments about this web site.Investment Advisory Services offered through Financial & Investment Management Advisors, Inc., an SEC Registered Investment Advisory Firm. Securities offered through LPL Financial, member FINRA/SIPC. Financial & Investment Management Advisors, Inc. is a separate entity and is is not affiliated with LPL Financial.The LPL Financial registered representative associated with this site may discuss and/or transact securities business with residents of the states listed in the following page: Regulatory Disclosure Information. Certified Financial Planner Board of Standards Inc. owns
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