Buy-Sell Agreements: The Many Benefits

This blog is the first of a three-part series discussing buy-sell agreements. When two or more individuals start a business together, it is imperative to have a buy-sell contract in place which details how the business will be sold when certain events occur. You have a significant amount of flexibility in drafting the terms of the buy-sell agreement, so it is typically a smoother process when the company is just getting started.

1. Cross-Purchase Agreement . This type of contract allows the remaining owners to purchase the departing owner’s interest.
2. Redemption Agreement . When an owner leaves the business, the company has the ability to buy the interest back.
3. Hybrid Agreement . In this type of contract, the company and/or the remaining owners can purchase the departing owner’s interest. The contract must set forth the priority between the two.

• Having more control over who can become a new co-owner in the business. For example, if an owner gets divorced or dies, you may not want their spouse or child to become a co-owner.
• You can establish how the sale of transfer of an ownership interest must take place. The owners can agree on a set market or certain mechanism for the purchase of an ownership interest.
• The agreement can detail how the purchase price of the owner’s interest will be calculated, as well as how the buyer must pay for it.
• The co-owners may want to include a provision that requires each of them to buy life and/or disability insurance in order to help fund the purchase price.