Funded and Unfunded Buy/Sell Arrangements

A buy/sell agreement is an agreement to buy or sell a business interest under pre-established terms that define when the interest can be sold and at what price. Depending on the pre-established terms, the transaction may be mandatory or optional, and may include one or more parties. Buy/sell agreements are helpful in family business planning for several reasons, including:
They allow you to plan what will happen to your business interest

• The provide a market for minority interests
• They can simplify estate planning
• They can help resolve disputes among owners by establishing valuation of business interests
• They can serve as a basis for valuing business interests during divorce

Buy-sell agreements come in three basic types: redemption, cross-purchase, and hybrid. A redemption agreement is when the business itself buys out an exiting owner’s share. A cross-purchase agreement is when the business’s co-owners buy out an exiting owner’s share. A hybrid agreement is a combination of a redemption and a cross-purchase agreement, establishing either redemption or cross-purchase as the secondary method of transaction.
To determine which buy/sell agreement is right for your family business, you should contact an experienced business attorney. After examining your business situation, your attorney will advise you on which type of agreement best suits your needs.