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.
The three primary types of buy-sell agreements are:
- Cross-Purchase Agreement. This type of contract allows the remaining owners to purchase the departing owner’s interest.
- Redemption Agreement. When an owner leaves the business, the company has the ability to buy the interest back.
- 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.
Whatever type of buy-sell agreement you decide to use, there are many benefits provided by it, including:
- 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.
There are many other factors to consider when drafting a buy-sell agreement. Be sure to read our next two blogs which discuss this type of contract further.
Contact us today to schedule your initial consultation. The attorneys at The Swenson Law Firm provide a variety of business law services to entities of all sizes.