Many individuals who own closely held business interests, such as an interest within a limited liability company or closely held corporation will enter into a buy sell agreement. These individuals (and perhaps their estate) may accomplish a number of planning objectives and goals with a buy sell agreement, and potentially optimize income, gift and estate tax outcomes and implications depending upon the overall situation.
When an individual owns a closely held business, which can be considered an interest in a business where no readily available public market exists, they may have a number of problems and related concerns regarding the closely held entity. The individuals within the business have likely invested significant capital, and their family’s economic security and growth may depend upon the success of this business. Moreover, if an owner of the business left due to disability, death, retirement or otherwise, the remaining owners may not want to work with a different or “new” individual, or with a member of the departed owner’s family. Therefore, a goal and objective of a buy sell agreement is wealth preservation (and liquidity of the ownership interest under certain circumstances) and the remaining business owners control, continuity and overall maintenance of the business without the need to bring in “outside” third parties who may not be wanted. There are multiple issues to discuss regarding a buy sell agreement such as the funding and pricing of the agreement and of course the overall income, gift and estate tax consequences from the agreement, which cannot be discussed all within one agreement. Thus, the remainder of this article will outline the general types of buy sell agreements, which are discussed below.
Generally, when an owner departs from a business there are two common purchasers of the business interest. The remaining owners may purchase the interest through a cross purchase agreement and the business entity may purchase the interest through a redemption agreement. These cross purchase agreement and redemption agreement may be able to be combined into one hybrid buy sell agreement. You may also have the possibility to have an agreement whereby the business interest is sold to an individual or business that previously, was not interested in the venture, or even to employee via an employee stock ownership plan. The common types or forms of a buy sell agreement may be called or referred to as: cross purchase agreements, sale to a successor, redemption agreements, a hybrid buy-sell agreement (this would be a combination between a cross purchase and redemption agreement) and sale to ESOP (employee stock option plan). These types of agreements will be discussed in more detail in later articles.
If you think a buy sell agreement could benefit you, contact The McGuire Law Firm to speak with a Denver business attorney. A Denver business attorney can assist you with your options and the drafting of necessary contracts and agreements.
