What Are Buy Sell Agreements? A buy-sell agreement helps determine what will happen to your business when you retire or die, of
if you become disabled. A buy-sell agreement can be structured either as a redemption agreement where
the business agrees to purchase your shares, or as a cross-purchase agreement, where the other shareholders
agree to purchase your shares.
Objectives of a Buy Sell Agreement
Creates fairness and equality among those family members in the business and those who are not.
Establish and maintains shareholder liquidity.
Establish a fair stock price and appropriate terms of sale.
Provides a method for funding the sale, even when the buyer does not have sufficient funds.
Provides a general framework for transfers, particularly for orderly transfers upon the death of a shareholder
and the retirement or disability of an employee shareholder.
Prevents outsiders from acquiring company stock
Funding The Agreement If insurance is used to fund the agreement, proceeds of insurance received by shareholders
are removed from the claims of the company’s creditors under a cross- purchase. A redemption approach permits
the use of corporate funds to purchase the stock or pay premiums on the life insurance policies purchased by
the corporation for the purpose of funding the agreement. The redemption approach keeps the funding arrangements
within the company’s control.
Each type of agreement has advantages and disadvantages, and which will be appropriate for your business
depends on the specifics of your situation.
