If you are buying a business that will include more than one co-owner, you need a buy-sell agreement. You have multiple reasons to put a buy-sell agreement in place and not one reason not to have a buy-sell agreement.
A well-drafted agreement can do these valuable things for you:
- Transform your business ownership interest into a more liquid asset
- Prevent unwanted ownership changes
- Save taxes and avoid hassles with the IRS
There are two types of buy-sell agreements: (1) cross-purchase agreements and (2) redemption agreements (sometimes called liquidation agreements).
When you enter into a cross-purchase agreement, it’s a contract between you and the other co-owners. Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the remaining co-owners when a triggering event occurs, such as death or disability.
When you enter into a redemption agreement, it’s a contract between the business entity itself and its co-owners (including you). Under the agreement, a withdrawing co-owner’s ownership interest must be purchased by the entity when a triggering event occurs.