Quick Guide: The Essentials of Buy-Sell Agreements

essentials of buy-sell agreements

If you are a business owner, you should have heard of a Buy-Sell Agreement by now, because having one in place can protect your business in a number of different circumstances. To learn more about the 3 W’s of Buy-Sell Agreements (What/Why/When), read Part 1 of our Quick Guide series on Buy-Sell Agreements on our blog and learn more about the essentials of these types of agreements in Part 2 below.

Quick Guide: Buy-Sell Agreements

Part 2: The Essentials

What are the elements of a successful Buy-Sell Agreement?

  • The agreement places limits on the transfer of ownership interests.
  • It provides the right to force buyouts.
  • Outlines a mutually agreed-upon valuation method.
  • Includes payment terms and funding.

What are the types of Buy-Sell Agreements?

  • Cross-Purchase: In this type of Buy-Sell Agreement, the other owner or multiple owners can purchase the departing owner’s share.
  • Redemption: The business itself would make the purchase so the owners do not have to go out of pocket individually, in this type of agreement.

Do I need to have insurance for a Buy-Sell Agreement?

  • A life or disability insurance policy is not required, but it can fund a buyout when the time comes.
  • The proceeds from the insurance policy are used to purchase the business interest from the disabled or deceased owner.

Are there tax implications?

  • Yes. As a business owner, you will need to review the potential tax liabilities associated with your Buy-Sell Agreement and ensure that each party is familiar with his or her obligations when the buy-sell is implemented.
  • Any Buy-Sell agreement containing a clause that would value the interest at less than fair market value is disregarded for tax purposes.
  • If the primary reason for the Buy-Sell Agreement is to create a liquidation event for the family (i.e. estate planning), there are certain criteria that must be met before the agreement is considered legitimate by the IRS.

For more information on Buy-Sell Agreements and how they can benefit you and your business, contact our Business Law team today by calling us or using the contact form below. Learn even more about these types of agreements in Part 3 of this quick guide series, Company Value and Other Elements of a Buy-Sell Agreement.

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