In a prior article, buy sell agreements were discussed in general, regarding the potential benefit to small business owners. The article below has been drafted by a business attorney to provide general information regarding certain types or forms of buy sell agreements that small business owners may be able to use for their buy sell agreement.
A cross purchase agreement is a form of buy sell agreement whereby the owners of the business will enter into an agreement holding that is one of the business owners withdraws from the business, the remaining business owners will acquire the withdrawing owner’s business interests. The acquisition of the interest can be directly from the business owner, or from the owner’s estate. The purchase price for the business interest will be determined and dictated by the cross purchase buy sell agreement, and the funding for the purchase price is the remaining (or contracting) owners of the business. Thus, the business does not pay for the interest that is being acquired. A cross purchase buy sell agreement can be contrasted to a redemption type buy sell agreement. Under the redemption agreement the business entity agrees to redeem the contracting owner’s interest when a specific event (triggering event) occurs. The specific triggering events could be the withdrawal of an owner, the death of an owner or other circumstances that will trigger the entities requirement to redeem or purchase the interest.
Business owners can also create a hybrid type buy sell agreement that is a combination of the cross purchase agreement and redemption agreement. Under the hybrid version of a buy sell agreement, the business entity has the primary right to purchase or redeem the business owners interest and the remaining business owner can be allowed (or perhaps required) to purchase the withdrawing owners interest to the extent the entity does not redeem or purchase the interest. The order of priority can also be reversed whereby the remaining owners have priority to purchase the withdrawing interest. However, it is important to note that if the entity is a C corporation, if the remaining shareholders have the primary obligation to purchase the withdrawing shareholder’s shares, but the corporation actually purchases the shares, the remaining shareholders are treated as if they received a dividend from the corporation to the extent of the corporation’s earnings and profits.
Business owners can also structure a buy sell agreement whereby the sale would be to a designated successor. The successor could be a complete outsider with no synergy with the business or an individual intertwined with the business.
A buy sell agreement can also be established as a sale to an ESOP. The ESOP would be designed to invest in the securities of the corporation that created the ESOP, and could provide a tax exempt means by which employees could participate in the business.
Thus, there are multiple options when drafting a buy sell agreement for your business. You can discuss these matters with a Denver business attorney if you have questions regarding a buy sell agreement or other business matters. The McGuire Law Firm provides a free consultation with a business attorney in Denver or Golden Colorado.
