A Business Succession Plan is a living document that outlines the transition of ownership to ensure continuity of the business in the event of an owner’s death or incapacity. A buy-sell agreement is often a large component of the succession plan. A buy-sell agreement is a binding contract that controls what happens to your ownership shares when you die, retire or become incapacitated. A properly drafted agreement will specify a set purchase price formula that offers protections against volatile markets, like those resulting from a pandemic. These agreements may also offer protection for family businesses to “keep it in the family”.
Let’s look at 3 different types of buy-sell agreements:
1. Redemption Agreements: These agreements require the business entity itself to buy out the owner’s shares upon a triggering event. This does not work for sole proprietorships because there is not distinction between the owner and the company. These agreements obligate the owner (or his estate) to sell to the company.
2. Cross-Purchase Agreements: These agreements require remaining owners of the company to purchase the shares upon a triggering event. They usually buy the shares proportionately to their own ownership.
3. Hybrid Buy-Sell Agreements: These types of agreements combine some of the elements of the other types of agreements by allowing the company first right of refusal and upon its decline, it may require the remaining owners to purchase the shares.
At Stouffer Legal, we help business owners plan for the future of the business with detailed succession and continuity planning. For more information on the type of buy-sell agreement that makes sense for your business and personal situation, schedule a consultation with one of our experienced attorneys by calling 443-470-3599.