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Buy-Sell Agreements

In some business settings, names or labels can be confusing; that is especially so when dealing with the law. Perhaps, no better example exists than an agreement commonly referred to as a “buy-sell agreement.”
At first glance, the label suggests that it is a sales agreement that a business owner would use to sell his or her business. In reality, it has nothing to do with that type of a transaction. Instead, it is an agreement that is developed between two or more owners in a business to govern how their ownership interests will be handled if one were to pass away, become disabled, retire or leave the company or if the company is no longer able to function as it was originally designed.
Historically, buy-sell agreements were of two types: “cross-purchase” (between the owners) or “redemption” (between the owners and the company). Today, most experienced professionals combine those types into a “hybrid” buy-sell agreement which gives the parties the benefit of having the provisions of both types available when dealing with the departure of one of the company owners. That flexibility is important because when the buy-sell agreement is drafted, it can be difficult to anticipate which provisions will best fit the company’s need many years later when an owner is no longer involved with the company.
However, even though a hybrid buy-sell agreement allows the parties maximum flexibility, it is still important that the owners understand the distinctions between cross purchase and redemption provisions before the agreement is signed. Those factors include, without limitation: (1) the number of owners in the company: (2) their age and (life) insurability: (3) how and from where payments in the agreement will be made; and (4) the tax consequences tied to those payments.
Because cross-purchase agreements require a separate arrangements between each owner, the sheer logistics of those agreements normally limit it to situations where there are no more than three (3) owners, and its optimal setting is where there are only two (2) owners. Any company owned by four (4) or more individuals almost always uses a redemption agreement to control how a departing owner’s interests are managed.
While such agreements are often drafted to stand alone, those same contract provisions can be incorporated into a well-drafted operating agreement for a limited liability company, a shareholder agreement for a corporate entity or a partnership agreement for a partnership. However, the means by which the owners decide to address these details is less important than the decision to address them at all. Too many companies are founded and operated with a tremendously risky business model, one where there is no plan for the death, disability, retirement, resignation or termination of an owner.
Instead of leaving those significant details to chance, thoughtful company owners take the time and spend the money to protect themselves when the company’s operations are disrupted by the sudden or at least unplanned departure of an owner.
Wright Legal Services, [Wright Law Office], PLLC has been advising companies and their owners for more than thirty (30) years through the maze of important details that must be addressed when considering the departure of an owner.
If you are an owner or manager or even a significantly-involved employee of a company that has no buy-sell agreement(s) in place, the professionals at Wright Legal Services, [Wright Law Office], PLLC can help you begin the process of addressing these details. And, if these circumstances fit you and you have an estate plan, the buy-sell agreement will be tailored to fit that plan. If not, then our team can help you establish a supporting estate plan that will tie very clearly to the provisions of the buy-sell agreement. Either way, the risk of disruption to the company will be managed and minimized to the point that the business has a very good chance to survive the departure of one of its principals.